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UPDATE 1-Bank of Canada sees rising business investment, frets over US-EU trade tensions

Nia Williams

trade tensions@ (Adds comments, details of speech, background)

CALGARY, Alberta, May 30 (Reuters) - The Bank of Canada said on Thursday that business investment should expand gradually overall but expressed concerns over increased trade frictions between the United States and the European Union.

Carolyn Wilkins, the bank's senior deputy governor, said the expanded investment should be led by firms outside the oil and gas sector, which has been hit hard by low prices and transport constraints.

"The growing investment in other sectors will show up in the headline numbers more clearly," she told a business audience in Calgary, Canada's energy capital, adding that attractive financing costs and government incentives should help.

The bank held interest rates steady as expected on Wednesday, saying there was evidence that the slowdown was temporary but signaling it would remain on the sidelines as it monitors economic developments.

Wilkins said the wild card in the bank's projections was the current trade war between the United States and China, adding that "we see the potential for more friction" between Washington and the European Union.

Canada has been caught up in the conflict between the United States and China, which is blocking imports of Canadian canola seed. "A big part of the bank's work" ahead of updated economic forecasts in July would be understanding the implications of various trade tensions, said Wilkins.

The bank raised rates five times between July 2017 and October 2018 but has not changed them since then, citing household debt levels, low oil prices and trade tensions. Wilkins reiterated that "the degree of accommodation being provided by the current policy interest rate remains appropriate".

The bank's governing council spent some time discussing the signals it should take from "a very flat, or in some cases, inverted yield curve", which she said partly reflected a change in tone by many central banks.

"They nonetheless also reflect a concern about the prospects for growth that is not reflected across other asset classes. We continue to be attentive to these signals," she said. (Reporting by Nia Williams in Calgary, writing by Kelsey Johnson and David Ljunggren in Ottawa; Editing by James Dalgleish)