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Bank of Canada Governor Stephen Poloz is seen during a news conference in Ottawa, Wednesday January 17, 2018.

Adrian Wyld

Canada's central bank has put interest rate hikes on hold as it weighs the fallout from a slowdown in household borrowing and looming U.S. tariffs on steel and aluminum.

As widely expected, the Bank of Canada kept its key interest rate unchanged at 1.25 per cent Wednesday. The bank has hiked three times since June, 2017, forcing up the rates commercial banks charge on mortgages and other loans.

The bank said it remains "cautious" about its next rate move as it ponders various downside risks to the economy, including a housing slowdown and rising protectionism.

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"While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target," according to a statement from the bank's governing council.

The statement could temper expectations that the central bank will raise rates three more times this year. A growing number of analysts now say that a more likely scenario is just one more hike in 2018 – raising the overnight rate to 1.5 per cent.

Some are even talking about an interest rate cut if trade problems worsen.

The Canadian dollar fell sharply after the announcement, trading down more than half a cent at 77 US cents by midafternoon.

"A wait-and-see approach is clearly appropriate," Toronto-Dominion Bank economist Brian DePratto said. "Now is not the time to rock the boat."

Canada's economy was slowing at the end of 2017, with annualized growth of 1.7 per cent in the fourth quarter. That's down sharply from the 3-per-cent pace for the year as a whole.

Wednesday's interest rate pause comes as U.S. President Donald Trump's threat of imminent tariffs on steel and aluminum imports is spreading fear of a global trade war. Canada is the largest exporter of both commodities to the U.S. It and other countries have vowed to retaliate if hit with U.S. tariffs.

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"If these punitive tariffs lead other countries to retaliate, the economic and inflation outlook could deteriorate very quickly," Laurentian Bank Securities chief economist Sébastien Lavoie pointed out.

Canada is also facing uncertainty over the fate of the North American free-trade agreement. The United States is demanding deep concessions from both Canada and Mexico in continuing renegotiation talks.

The central bank acknowledged these growing trade problems in its statement.

"Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks," the bank said, even while acknowledging that global growth remains solid.

The other main preoccupation for the bank is the housing sector, particularly in B.C. and Ontario, as higher interest rates and various government-led measures cool housing activity.

The Bank of Canada pointed out that household credit growth has "decelerated for three consecutive months" – in November, December and January.

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The bank said it will take "some time to fully assess" the effect of new restrictions on access to federal mortgage insurance as well as measures by the B.C. and Ontario governments to discourage housing speculators and foreign buyers.

Toronto's housing market is showing clear signs of cooling, with resale activity down sharply in recent months. But the Vancouver market remains much hotter, with prices still rising.

"The bank continues to monitor the economy's sensitivity to higher interest rates," according to the statement.

Meanwhile, the bank said inflation is "running close" to the bank's 2-per-cent target. The bank said its various measures of core inflation have "edged up, consistent with an economy operating near capacity," according to the statement.

The bank cautioned that while wage growth has "firmed," it "remains lower than would be typical in an economy with no labour market slack."

Bank of Canada deputy governor Timothy Lane is expected to elaborate on the rate decision in a speech Thursday in Vancouver. It's part of an effort by the bank to improve communications when rate announcements occur without a news conference by Governor Stephen Poloz.

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The bank's next rate announcement is slated for April 18, when the bank releases its second quarterly economic forecast of 2018.

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