C$ advances after Bank of Canada keeps rates steady

TORONTO: The Canadian dollar strengthened against its US counterpart on Wednesday after the Bank of Canada kept interest rates steady and said it was satisfied with how the market and the economy reacted to its surprise rate cut in January.

The bank kept its benchmark overnight interest rate at 0.75 percent and said that the risks around inflation were more balanced following its unexpected 25 basis point rate cut in January.

The market had expected the central bank to keep rates steady for now and was looking for clues on whether a rate cut might be expected in the near future.

Before the bank's announcement on Wednesday, the market had pricing in about a 60 percent chance of a rate cut in April. After the bank's the bank's comments about the economy, those expectations were scaled back to about 25 percent.

The bank said in January it expects economic growth of 1.5 percent in the first half of 2015 and did not change that forecast on Wednesday.

"For them to cut any further you'd have to see growth showing downside surprise relative to 1.5 percent growth," said Craig Wright, chief economist at Royal Bank of Canada.

"We think growth will be a bit better than that. If our growth forecast is correct, then they won't need to go any further."

At 10:32 a.m. (1532 GMT), the Canadian dollar was at C$1.2455 to the greenback, or 80.29 US cents, stronger than Tuesday's finish of C$1.2490, or 80.06 US cents.

Canada is a major oil producer and currency strategists are still calling for a weaker Canadian dollar, linked to low oil prices, in coming months, according to a Reuters poll released before the bank's statement.

"We still see some risks to the downside for oil," Wright said. "So I think alongside of that, alongside a US dollar recovery and alongside the Fed liftoff (on higher interest rates) that we expect in June, that all suggests we should see a continued weakness in the Canadian dollar in the near term."

Canadian government bond prices were lower across the maturity curve. The two-year fell 25.5 Canadian cents to yield 0.0.632 percent and the benchmark 10-year fell 99 Canadian cents to yield 1.524 percent. Both yields were at its highest levels since around mid-January.