UPDATE 2-Bank of Canada holds rates steady, cites trade uncertainty

(Adds market reaction, analyst comment)

OTTAWA, March 7 (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, saying that trade policy is an "important and growing source of uncertainty," dovish language that weakened the Canadian dollar and lowered expectations for future rate hikes.

Reiterating its key January phrasing word-for-word, the bank said that while more hikes are probably warranted, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target, and pledged caution in considering future rate moves.

"It meets the general expectation of a dovish statement. It seems to me the Bank of Canada is trying to find all the reasons possible to delay further hikes," Sebastien Lavoie, chief economist at Laurentian Bank, said.

The bank has hiked rates three times since last July, but financial markets now expect the bank to wait until July at the earliest to raise again.

The Canadian dollar, already weakened by the threat of a trade war with the United States, sank in response to the bank's dovish tone to hover near its weakest level since July 2017.

Nodding to the dual influences of policy decisions in the United States, Canada's largest export market, the bank said that new U.S. government spending and tax cuts are anticipated to boost American growth in 2018 and 2019.

"However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks," the bank said.

U.S. President Donald Trump said last week he would impose global tariffs on steel and aluminum, later adding that Canada could get a better deal if it agrees to U.S. terms in the renegotiation of the North American Free Trade Agreement. Canada is hoping for an exemption from the tariffs. NAFTA spans the United States, Canada and Mexico.

Disruptions to trade would sideswipe Canada's export-led economy and make it difficult for the Bank of Canada to continue hiking rates, even as inflation pressures are beginning to build.

Turning to Canada's precarious housing market, the bank said strong data late in 2017 and softer data this year suggests that some demand was pulled forward ahead of new mortgage rules that have made it harder for some buyers to get financing, and that more time is needed to assess how the changes will play out.

"While largely devoid of surprises, this statement gives zero sense of urgency for further rate hikes, and seems to fit in with our view that the Bank is on the sidelines until the second half of the year," Doug Porter, chief economist at BMO Capital Markets, said in a note to clients. (Additional reporting by Fergal Smith in Toronto; Editing by Will Dunham and Susan Thomas)