(Repeats to add 'Update 1' tag to headline. No changes to text)
By Leah Schnurr and David Ljunggren
OTTAWA, May 25 (Reuters) - The Bank of Canada kept interest
rates on hold on Wednesday, saying the economy would shrink in
the second quarter as a result of damage from recent wildfires
in Alberta before rebounding later in the year.
The central bank's preliminary assessment is that the fires
and related suspension of oil production will trim about 1.25
percentage points off real gross domestic product growth in the
current quarter. In its last forecast in April, the bank had
projected 1.0 percent growth for the quarter.
"The second quarter will be much weaker than predicted
because of the devastating Alberta wildfires," the bank said in
a statement.
The fires have cut daily oil production by more than 1
million barrels, according to officials. About half of the
nation's oil sands capacity remains shut, according to Reuters'
calculations.
The bank kept interest rates at 0.50 percent, as widely
expected, saying it expected to see a rebound in the third
quarter as oil production restarted and reconstruction began.
Overall, the Canadian economy's adjustment to the lower
price of oil is uneven, the central bank said. Although business
investment and intentions remain disappointing, first-quarter
growth appears to be in line with the bank's 2.8 percent
forecast from April.
Recent economic indicators suggest the United States,
Canada's main trading partner, will see solid growth this year
despite weakness at the start of 2016, the bank said. Improved
growth south of the border is key to the bank's outlook as it
hopes to see stronger demand for Canadian exports.
The bank noted that oil prices had rebounded somewhat,
partly due to short-term supply disruptions. The shock from the
drop in oil prices had prompted the bank to cut rates twice last
year as the economy slipped into a mild recession.
Even so, oil prices remain well off their 2014 peak. As the
economy adjusts to lower prices, the housing market is
continuing to show strong regional divergences and household
vulnerabilities have moved higher, the bank said.
Canada's housing market has been robust in the years since
the financial crisis, partly boosted by low interest rates. But
the market is becoming more fractured, with activity slowing in
oil-sensitive regions and accelerating in the major cities of
Toronto and Vancouver.
(Editing by Bernadette Baum)