UPDATE 3-Bank of Canada holds rates, cites weaker growth

* Bank holds rates at 1 pct for second consecutive time

* Says exports exerting “significant drag” on growth

* Inflation broadly in line with expectations

* Sees bigger risk of market turmoil from Europe debt woes
(Adds link to graphic)

By Louise Egan

OTTAWA, Dec 7 (BestGrowthStock) – The Bank of Canada held its key
interest rate steady on Tuesday and set the stage for rates to
stay unchanged into next year by emphasizing its concern over
weaker exports and the risks posed by Europe’s debt woes.

The bank, as expected, maintained its overnight lending
target at 1 percent for a second consecutive time. In June it
had become the first central bank in the G7 advanced countries
to raise borrowing costs following the recession, and
subsequently raised rates twice more.

“Any further reduction in monetary policy stimulus would
need to be carefully considered,” it said in a statement,
repeating language used in its last decision in October.

The Canadian dollar (CAD=D4: ) softened to C$1.0041 to the
U.S. dollar, or 99.59 U.S. cents, from about C$1.0027, or 99.73
U.S. cents, right before the announcement. It later recovered.

All 44 forecasters surveyed by Reuters last week had
predicted no change in rates, but markets are divided on the
timing of the first increase in 2011.

The bank’s overall tone was not much different from six
weeks ago when it signaled it would need considerable
persuasion that the global recovery was gaining traction before
increasing rates again, analysts said.

It said the global and domestic recoveries were advancing,
but it warned of an increased risk that Europe’s sovereign debt
concerns could trigger financial market strains.

The bank also said the trade-reliant Canadian economy was
recovering slightly more slowly than it projected in its
quarterly outlook in October as the strong Canadian dollar
hampered exports.

“There’s a lot of focus on risks and risks that have
increased and sovereign debt is mentioned explicitly and that
seems to be the trump card right now keeping the Bank of Canada
from actually playing the tightening game,” said Eric
Lascelles, chief Canada macro strategist at TD Securities.

“I think the market is left to conclude that rate hikes are
probably not coming early in 2011 based on this statement,” he
said.

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For a graphic on Bank of Canada interest rates and

inflation, click here: http://r.reuters.com/kys88q

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INFLATION SPIKE IGNORED

Analysts in the Reuters poll predicted the first rate hike
of 2011 would be in May, according to the median forecast. But
Canada’s 12 primary dealers were more dovish on average, taking
the view that the move would not come until July.

Markets were pricing in an 88.4 percent probability the
bank would hold rates steady on Jan. 18, its next policy
announcement date, up slightly from 86.3 percent earlier in the
session. (BOCWATCH: )

Canadian third-quarter growth fell below the bank’s
expectations at an annualized 1 percent. But household spending
was stronger than expected and business investment rebounded.

The bank appeared unfazed by October’s higher than expected
inflation of 2.4 percent, which had prompted some analysts to
predict a rate hike early next year rather than later. It said
underlying price pressures remained unchanged.

“It seems like the major theme here is that they’re a
little more dovish than they were here in October. Nothing
radical by any means,” said Doug Porter, deputy chief economist
at BMO Capital Markets.

The bank targets a 2 percent annual inflation rate, but
tolerates a range of 1 to 3 percent.
(Reporting by Louise Egan and David Ljunggren; editing by
Peter Galloway)

UPDATE 3-Bank of Canada holds rates, cites weaker growth