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UPDATE 1-Bank of Canada holds rates, says economic slowdown likely temporary

Kelsey Johnson and Steve Scherer

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OTTAWA, May 29 (Reuters) - The Bank of Canada held interest rates steady as expected on Wednesday, but said there was increasing evidence that the economic slowdown was temporary and that growth accelerated in the second quarter.

The central bank left its overnight rate at 1.75% and repeated language that current rates remain "appropriate". Inflation is expected to remain around the bank's 2% target in coming months, it said.

On April 24, the bank cut its growth forecast for the first half of 2019 to 1.2% from 1.7% and removed wording about the need for future hikes. The central bank repeated that its future policy decisions will remain data dependent.

"Recent data have reinforced Governing Council's view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased," the central bank said in a statement.

The Bank of Canada raised rates five times between July 2017 and October 2018. It has since stayed on the sidelines citing the economic challenges posed by high levels of household debt, low oil prices and trade tensions between the United States and China.

Though the bank was more optimistic on the growth outlook, it said there were increasing risks stemming from global trade.

"The recent escalation of trade conflicts is heightening uncertainty about economic prospects," the central bank said. "Trade restrictions introduced by China are having direct effects on Canadian exports."

Since March, Chinese importers have stopped buying Canadian canola seed exports. However, the bank noted that decreasing trade tensions with the United States should have a positive effect.

The United States this month lifted tariffs on Canadian steel and aluminum products, clearing the way for ratification of a new North American trade agreement.

Both of these developments will have "positive implications for Canadian exports and investment," the bank said.

Furthermore, the Bank of Canada said the oil sector "is beginning to recover as production increases and prices remain above recent lows," while the country's housing market appears more stable nationally.

(Reporting by Kelsey Johnson and Steve Scherer Editing by Susan Thomas)