Bank of Canada holds rates steady, cites economic slack

By Andrea Hopkins and Leah Schnurr

OTTAWA (Reuters) - - The Bank of Canada pointed to undiminished uncertainty and a "significant amount" of slack in the Canadian economy as it held interest rates steady on Wednesday, noting that inflation is below expectations and growth set to slow as 2016 draws to a close.

The decision by the central bank to leave interest rates unchanged was widely expected and sets the stage for a divergence in monetary policy with the United States, where the Federal Reserve is expected to hike rates later this month.

Dropping its usual language about the balance of risks, the Bank of Canada said the current state of monetary policy "remains appropriate."

The bank said more moderate growth is expected after a rebound in the third-quarter, but business investment and non-energy goods exports continue to disappoint and total consumer price index (CPI) inflation is slightly below expectations despite a pickup in recent months.

"There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States," the bank said in a statement.

While global economic conditions have strengthened, the bank said that uncertainty, which has been undermining business confidence and dampening investment in Canada's major trading partners, "remains undiminished."

The bank noted the rapid back-up in global bond yields since the U.S. election on Nov. 8, partly reflecting "market anticipation of fiscal expansion in a U.S. economy that is near full capacity" and said Canadian yields have risen significantly in this context.

In October, Governor Stephen Poloz said the Bank of Canada had actively considered cutting rates, but elected to leave the key overnight rate at 0.5 percent, where it has been since the bank cut rates in July 2015.

The bank said the fiscal stimulus provided by Canada's Liberal government is only partly showing up in the economy, with the child tax benefit supporting consumption in the third quarter but no evidence of federal infrastructure spending yet seen in gross domestic product data.

It noted that household imbalances continue to rise, but said these would be mitigated over time by changes to housing finance rules.

Canada's government and banking regulators have tightened mortgage rules to prevent borrowers from taking on too much debt to get into the housing market, and lenders from taking on too much risk, amid fears of a real estate bubble.

(Reporting by Leah Schnurr and Andrea Hopkins; Editing by Will Dunham)