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Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Ontario, Canada, October 25, 2017.

CHRIS WATTIE/REUTERS

The Bank of Canada is suddenly in no hurry to push interest rates higher as it grapples with a raft of uncertainties, including the possible end of NAFTA, slowing growth and a puzzling lack of inflation.

After two quick and largely unexpected rate hikes in July and September, the central bank hit the pause button on Wednesday, opting to keep its benchmark interest at 1 per cent.

Governor Stephen Poloz acknowledged that the economy will likely need "less monetary stimulus" going forward. But he declined to be more specific about the timing or pace of future rate moves, insisting the bank would be cautious in the face of abnormal economic conditions.

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Already pinched, many Canadians anxious about higher rates

"We have to validate our story in real time," Mr. Poloz told reporters. "I'm afraid I can't tell you whether it will be three months or six months or nine months or December. We learn from every data point."

Economists and investors interpreted the central bank's suddenly more guarded tone as a sign that the next rate hike is now more likely to come later, rather than sooner.

"It appears that the urgency to increase rates has faded," Toronto-Dominion Bank economist Brian DePratto said in a research note.

The probability of a December rate increase has fallen to 34 per cent from 80 per cent since early September, according to Bloomberg's gauge of investor sentiment. The chance of a January hike now stands at 64 per cent, down from more than 87 per cent a month ago.

The diminished likelihood of imminent rate hikes sent the Canadian dollar tumbling nearly a full cent immediately after the announcement, touching its lowest level against its U.S. counterpart since July. By the end of the day, the loonie was trading at 78 cents (U.S.), down from 78.8 cents ahead of the rate decision.

The Bank of Montreal said it now expects the central bank's next rate increase to come in March, rather than January, and that it will make three hikes in 2018, instead of four.

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"We now believe that the bank will pause for longer, given the greater uncertainty over NAFTA, as well as the recent steps taken by [regulators] to cool the housing market," BMO Nesbitt Burns Inc. chief economist Douglas Porter said.

At the other end of the spectrum, Laurentian Bank Securities is forecasting just one hike next year, pushing the overnight rate to 1.25 per cent.

Among the challenges facing Mr. Poloz is that while the economy is already running close to full capacity, inflation and wage growth are muted. Indeed, the bank said inflation won't get back to its 2-per-cent target until the second half of next year because of the recent strength of the Canadian dollar. The dollar is up nearly 8 per cent since May, even after Wednesday's decline.

The bank has also ratcheted up its concern about the Trump effect on Canada's export-dependent economy. Rising protectionism in the United States is now "the greatest source of uncertainty" clouding Canada's economic outlook, the bank warns in its latest monetary policy report, also released on Wednesday.

The bank cited both the uncertainty over the North American free-trade agreement and "targeted discretionary" protectionist measures, such as the massive tariffs imposed recently on Bombardier Inc.'s new C Series commercial jets.

The risk is that companies may respond to protectionist and competitive pressures by moving production out of Canada. Indeed, Mr. Poloz said it's likely that businesses are already investing less than they otherwise would here because of the uncertain trade environment.

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The NAFTA negotiations hit a major roadblock last week after the United States put tough demands on the table last week, including a minimum U.S. content threshold for autos, an end to the deal's dispute-settlement regime and a phase-out of Canada's protected dairy and poultry markets.

The Bank of Canada raised its forecast for growth this year to 3.1 per cent, or roughly in line with many private-sector forecasters. That's up from its July forecast of 2.8 per cent. The bank sees growth slowing to 2.1 per cent in 2018 and 1.5 per in 2019.

The bank also said it expects growth to "moderate to a more sustainable pace" in the second half of this year, with annual GDP growth of 1.8 per cent in the third quarter and 2.5 per cent in the fourth quarter because of weaker consumer spending and housing activity. The bank blamed the pullback on higher interest rates, tighter mortgage rules and measures in Ontario designed to discourage foreign speculators in the housing market. Exports and business will continue to make a "solid contribution" to growth, the bank said.

Another growing concern for the central bank is the "unexplained softness" of Canadian inflation. The bank pointed out that while the unemployment rate has continued to fall, other labour market indicators are still lagging, including wage growth and average hours-worked, both of which remain below historical averages.

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