By Andrea Hopkins and Leah Schnurr
OTTAWA, March 7 (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, saying that trade policy is an "important and growing source of uncertainty," dovish language that weakened the Canadian dollar and lowered expectations for future rate hikes.
Reiterating its key January phrasing word-for-word, the bank said that while more hikes are probably warranted, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target, and pledged caution in considering future rate moves.
"It meets the general expectation of a dovish statement. Its eems to me the Bank of Canada is trying to find all the reasons possible to delay further hikes," Sebastien Lavoie, chief economist at Laurentian Bank, said.
The bank has hiked rates three times since last July, butfinancial markets now expect the bank to wait until July at theearliest to raise again. BOCWATCH
The Canadian dollar, already weakened by the threat of atrade war with the United States, sank in response to the bank'sdovish tone to hover near its weakest level since July 2017.
Nodding to the dual influences of policy decisions in theUnited States, Canada's largest export market, the bank saidthat new U.S. government spending and tax cuts are anticipatedto boost American growth in 2018 and 2019.
"However, trade policy developments are an important andgrowing source of uncertainty for the global and Canadianoutlooks," the bank said.
U.S. President Donald Trump said last week he would imposeglobal tariffs on steel and aluminum, later adding that Canadacould get a better deal if it agrees to U.S. terms in therenegotiation of the North American Free Trade Agreement. Canadais hoping for an exemption from the tariffs. NAFTA spans theUnited States, Canada and Mexico.
Disruptions to trade would sideswipe Canada's export-ledeconomy and make it difficult for the Bank of Canada to continuehiking rates, even as inflation pressures are beginning tobuild.
Turning to Canada's precarious housing market, the bank saidstrong data late in 2017 and softer data this year suggests thatsome demand was pulled forward ahead of new mortgage rules thathave made it harder for some buyers to get financing, and thatmore time is needed to assess how the changes will play out.
"While largely devoid of surprises, this statement giveszero sense of urgency for further rate hikes, and seems to fitin with our view that the Bank is on the sidelines until thesecond half of the year," Doug Porter, chief economist at BMOCapital Markets, said in a note to clients.