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UPDATE 3-Bank of Canada holds interest rates steady after mulling cut

Kelsey Johnson

(Adds comment from Bank of Canada governor, recasts lead, add quotes, details)

OTTAWA, Oct 30 (Reuters) - Canada's central bank held rates steady as expected on Wednesday, but only after it mulled a possible cut to help the economy weather the damaging effects of global trade conflicts, Bank of Canada Governor Stephen Poloz said.

The Bank of Canada trimmed domestic and global growth forecasts but maintained its key overnight interest rate at 1.75%. It said the current level of stimulus remained appropriate and made no mention of future moves, but cautioned the Canadian economy was not immune to the uncertainty.

"(We) considered whether the downside risks to the Canadian economy were sufficient at this time to warrant a more accommodative monetary policy as a form of insurance against those risks," Poloz told reporters. "We concluded they were not."

Trade tensions were restraining business investment while helping to cut commodity prices, the bank said, adding the country's economy will "be increasingly tested as trade conflicts and uncertainty persist."

The Canadian dollar declined to a near two-week low, hitting 1.3186 to the U.S. dollar, or 75.84 U.S. cents, after the rate decision.

Canada's central bank has remained firmly on the sidelines since October 2018, opting to hold steady even as its counterparts, including the U.S. Federal Reserve, ease. The Fed was expected to cut rates again on Wednesday.

Analysts said the bank's tone was softer than anticipated.

"This reads dovishly," said Andrew Kelvin, chief Canada strategist at TD securities. "I think the market reaction has this right."

Poloz said the bank had studied whether the insurance provided by a cut might trigger higher financial vulnerabilities and as well as economic and inflationary consequences. Canada's inflation is, and is expected to stay near, the bank's 2% target.

No such insurance cut was considered in September, Poloz said during a news conference, although "certainly we could see which way the winds were blowing, that the risks were beginning to accumulate on the foreign side."

The bank revised its 2019 Canadian growth projection upwards to 1.5% from 1.3%, while reducing its 2020 and 2021 forecasts to 1.7% from 1.9% and 1.8% from 2.0%, respectively because of weaker foreign demand, trade uncertainty and lower government spending in Alberta, the country's main oil-producing province.

It also revised its 2019 global growth estimate downward to 2.9% from 3.0%, its weakest pace since the 2007-2009 global economic and financial crisis, while the bank's 2020 global growth forecast was trimmed to 3.1% from 3.2% as trade conflicts weaken the world economy.

"While the bank will never set the table for any rate moves, it's pretty clear that they're quite concerned about the global trade outlook," BMO's chief economist Doug Porter said in an interview. The bank, he added "gave a number of hints they would be prepared to move if things deteriorate at all in the months ahead."

In its rate decision Wednesday, the bank said it would "be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment" in its monetary policy considerations, while also watching consumer spending, housing activity and fiscal policy developments. (Reporting by Kelsey Johnson, Additional reporting by Fergal Smith, Moira Warburton and Jeff Lewis in Toronto, Editing by David Ljunggren, Steve Orlofsky, Bill Berkrot and Tom Brown)