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Sluggish Canadian growth mutes talk of rate hikes

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Canada's economy grew less than expected in October, prompting several analysts to predict that the Bank of Canada would be in no rush to raise interest rates any time soon.

Gross domestic product by industry grew by 0.2 percent from September, Statistics Canada said today. Analysts polled by Reuters had expected a 0.3-percent increase after a 0.1-percent dip in September.

Earlier this month, the Bank of Canada held its benchmark rate steady at 1 percent for the second straight time, after raising rates three times earlier this year, and said any future hikes would have to be considered carefully.

Recent data show the Canadian economy has slowed down markedly since the beginning of the year and will do well to reach the central bank's forecast of 2.6-percent annualized growth in the fourth quarter.

"No policy action is likely until the bank is convinced that the economy is growing at a stronger clip on a sustained basis ... we expect it will likely take until the second quarter of 2011 before the bank resumes raising its policy rate," said Dawn Desjardins of RBC Economics.

Oil and gas extraction in October rose 1.3 percent from September, in part due to better weather, while mining was up 2.7 percent due to the end of labor disputes at copper, nickel, lead and zinc mines.

The biggest drag was the long-suffering manufacturing sector - hit by a strong Canadian dollar and weak U.S. demand - which decreased by 0.6 percent. The construction sector was also down 0.5 percent on slack residential building demand.

"The details are worse than the headline miss as growth was barely evident on a sector by sector basis. That supports our view that the Bank of Canada is on an extended pause (on interest rates)," said Derek Holt and Gorica Djeric of Scotia Capital Economics.

The Canadian dollar firmed slightly on the data and by 10:30 a.m., it was at $1.0118 Cdn to the U.S. dollar, up from Wednesday's North American session close at $1.0142 Cdn to the U.S. dollar.

Based on a Reuters calculation, the market is pricing in an 91.64-percent chance the Bank of Canada will keep rates on hold at its next policy announcement date on January 18 and will not move until the end of May.

The International Monetary Fund said on Wednesday that there were big risks to Canada's economy as the recovery loses steam, citing the patchy U.S. recovery and sovereign debt concerns in Europe.

"The modest rebound in October shows that the Canadian economy is now struggling to generate any serious momentum after a flashy start to the recovery," said Doug Porter of BMO Capital Markets.

"For the expansion to move to the next level, we need the U.S. economy to kick into a higher gear - thankfully, that looks to be precisely the case," he added, citing simulative U.S. fiscal policies and pent-up demand south of the border.

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