Bank of Canada holds key interest rate at 0.5%

The Bank of Canada kept its benchmark interest rate unchanged at 0.5 per cent on Wednesday andreducedits growth outlook for the economy, citingcited slower short-term activity in the resale housing market coupled withsoft Canadian exports as reasons for theloweredoutlook.

Thecentral bank trimmed its outlook for growth this year to 1.1 per cent, from the 1.3 per cent it had forecastin July.

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Speaking to reporters in Ottawa,Bank of Canada governor Stephen Poloz called therecentfederally mandated mortgatemeasuresbrought in to stabilize the Canadian housing market "a welcome development, as it will mitigate financial vulnerabilities over time."

"We expect it to reduce housing resales in the near term, and perhaps cause a shift toward the construction of smaller homes, which together will shave some spending in the economy," Poloz said.

The central bank said it sees the new mortgage rules knocking0.3 per cent from economic growthby the end of 2018.

Export issues

Meanwhile, Canada's exports of goods posted gains in July and August, after a sharp contraction over the previous five months, but that was not enough to make up for previously lost ground, the bank said.

Weak U.S. business spending and lower expectations for the housing marketin the United States, Canada's top trading partner, have led to a reduction in the bank's outlook for growth in our exports over the next two years.

The downward cut to exports, including spillovers to demand here in Canadaand to our imports, would lowerreal GDP by 0.6 per cent by the end of 2018.

Poloztold reporters thatU.S. economic weakness in the first half of this year explains half of the shortfall in Canada's exports, but they are looking at other factors, including lost export capacity and competitiveness challenges, as other possible reasons.

"In our surveys, companies have mentioned a number of factors that can influence competitiveness or hinder exports directly," Poloz said. "These include deficient infrastructure, regulatory uncertainty, rising trade barriers, relatively high electricity costs, and the unknown status of current and future trade agreements."

Overall, the bank said it nowexpects the economy to grow bytwoper cent in both 2017 and 2018, saying theeconomy is now forecast to get back tofull capacity around mid-2018, later than it said in July.

No pending hike seen

Many economists said thelatest economic outlook put the Bank of Canada in a more "dovish" position on interest rates, meaning it appeared less inclined to nudge up borrowing costs.

"This is a bank that has precisely zero appetite for rate hikes, and seems to be keeping a flame alive for the possibility of rate cuts, should the need arise," BMO chief economistDouglas Porter said in a commentary.

"We continue to look for the bank to keep rates unchanged through next year, with the earliest possible move up not until 2018," he said.

Poloz said the central bank's governing council actually discussed whether to addmore monetary stimulus to the economy, but theyopted to hold off, citing several uncertainties, including the:

• Effects of the new federal mortgage rules.
• Expectedoutlook forexports.
• Impactof federal fiscal measures.
• Effects on business confidence of the Nov. 8 U.S.election.

TD Bank economist Brian DePrattosaid in a commentarythat aninterest rate cut "would likely do little to nothing" to spur Canada's exports, "while potentially undoing much of the impact of recent housing market rule changes, spurring further financial stability risks."

Dominion Lending Centres chief economist Sherry Cooper said she thinks it would take a "material negative shock" to economic to force the bank tocut interest rates.

"That shock might comefrom a larger-than-expected contraction in housing activity among other sources," Cooper said.