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Bank of Canada abandons neutral reference, holds rates steady

By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - The Bank of Canada dropped any reference to taking a neutral stance on interest rates on Wednesday after having already signaled that it would generally not give forward guidance on its rate moves.

The bank kept its key overnight rate at 1 percent, where it has been for more than four years, but this had been universally expected and markets were looking more for its overall outlook and analysis. In September it had said it was neutral on the timing and direction of rate changes.

Bank Governor Stephen Poloz said earlier this month he wanted to get out of the business of publicly predicting where rates would go, reserving forward guidance generally for when rates are at, or near, zero. He told Reuters at the time he did not know whether he would eliminate the neutral reference.

The bank did voice new concern on Wednesday about Canada's heated housing market and household debt but it said underlying inflationary pressures remained muted and the risks to its inflation projection were roughly balanced, falling within the zone for which the current interest rate is appropriate.

In July, the bank had said elevated household imbalances were evolving in a constructive way; this changed in September to saying risks associated with household imbalances had not diminished. On Wednesday, it went further: "The financial stability risks associated with household imbalances are edging higher."

"Housing activity has been more robust than anticipated, buoyed by continued very low mortgage rates and exhibiting strength beyond a rebound from weather-depressed levels earlier in the year," it said in the quarterly Monetary Policy Report that accompanied its rate statement.

The bank said that housing markets in Eastern Canada showed signs of a soft landing, but were generally robust and much tighter in major cities in Ontario, Alberta and British Columbia. "Household imbalances could increase further," it added.

"The ratio of household debt to disposable income is expected to edge higher from its current elevated level before stabilizing by 2016," the bank said.

It further pushed back the time frame for when it reckoned the economy would reach full capacity: to the second half of 2016 from its mid-2016 estimate in July.

The bank also delayed by one quarter, to the fourth quarter of 2016, its forecast for when total and core inflation would settle at its 2 percent target.

A significant portion of the rise in inflation since the beginning of the year reflected temporary factors, which suggests it can "look through" or ignore them as they do not reflect an underlying tightening of the economy, the bank said.

It said that while lower prices for oil and other commodities were tempering Canadian incomes, Canada's exports have begun to respond to stronger U.S. demand and to a weaker Canadian dollar.

(Editing by Peter Galloway)

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