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Bank of Canada holds interest rates, opens door to possible cut

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OTTAWA (Reuters) - The Bank of Canada maintained its key overnight interest rate at 1.75% as expected on Wednesday but opened the door to a possible cut should a recent slowdown in Canadian economic growth drag on.

The central bank - which has kept rates unchanged since October 2018 - said that while the economy has been resilient, recent economic data has been mixed, and noted “unexpectedly soft” indicators of consumer confidence and spending, and weaker business investment.

It slashed its forecast for fourth quarter annualized growth to 0.3% from 1.3% in October.

“In determining the future path for the Bank’s policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast,” the central bank said.

After the rate decision, the Canadian dollar quickly dropped about half a cent against its U.S. counterpart to C$1.3130, or 76.16 U.S. cents. Money markets now see about a 20% chance of a rate cut in March. [BOCWATCH]

The statement marked the second time in a matter of months the bank has mused about easing. Governor Stephen Poloz told reporters in October the bank had discussed whether a rate cut was needed to insure against risks to the economy.

“The fact that the Bank of Canada didn’t include the word ‘appropriate’ in its statement says it all,” said Simon Harvey, FX analyst for Monex Europe and Monex Canada.

“Rates are going to change at some point this year - is what markets have taken out of it,” he said.

The Canadian economy was no longer operating close to capacity, the bank said, adding it would pay particular attention to developments in consumer spending, the housing market and business investment.

The bank pegged annualized growth for the first quarter of 2020 at 1.3%, down from a previous internal forecast of 1.7%. It said real Canadian GDP for 2020 would be 1.6% rather than the 1.7% it predicted in October but raised its 2021 forecast to 2.0% from 1.8%.

While some of the recent slowing of growth was due to temporary factors, like strikes, poor weather and inventory shifts, the bank said other factors might be at play.

“The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted,” it said, adding Canadians had also been saving more, a possible sign of increased consumer caution.

Reporting by Kelsey Johnson and David Ljunggren in Ottawa, additional reporting by Fergal Smith, Allison Martell, and Nichola Saminather in Toronto; Editing by Bernadette Baum

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