Portugal Colonial - Canada central bank holds key rate steady, says economy improving

Canada's economy had sputtered over the past year, as Trump's tariffs squeezed key sectors like auto-making, forced job losses and sent jitters across the business community.

Canada entered a technical recession earlier this year, after reporting two consecutive quarters of economic contraction.

But the Bank of Canada on Wednesday pointed to signs of a rebound.

"Canada's economy is showing signs of improvement," the bank said.

Bank of Canada Governor Tiff Macklem noted that while uncertainty surrounding "US trade policy continues to be a headwind, consumers have been resilient and businesses are adapting."

Exports are picking up as businesses explore new ways to get by with US free trade still restricted in several sectors, Macklem said.

"They're reconfiguring their supply chains," he told reporters.

"The other factor is the US economy is strong... they need our exports and you're seeing US businesses increasingly increase their orders for our Canadian exports."

Trump on July 1 refused to renew the North American free trade agreement, but it remains in force while the United States, Canada and Mexico negotiate revised terms.

The survival of the deal known as the USMCA means that roughly 85 percent of US-Canada trade has remained tariff free.

But Prime Minister Mark Carney has warned that US trade will not return to a pre-Trump normal and is pushing Canada to aggressively pursue new markets overseas.

Macklem said there were indications that was happening, pointing to aluminum, a key Canadian sector facing punishing Trump tariffs, where businesses are "finding new customers in Europe."

- Iran war -

The conflict in the Middle East remains a key risk factor, Macklem added, with hostilities between the US and Iran resuming after a short-lived ceasefire.

The bank has said it would not over-react to energy price inflation caused by the conflict and would only move to raise rates if it saw clear evidence that elevated oil prices were bleeding into other parts of the economy.

"So far, we're not seeing broad spillovers of higher energy prices," Macklem said.

Macklem stressed that a key factor would be how long oil prices stay high.

"The war is ongoing and I certainly cannot predict when it might get resolved," he said.

Any sign that war related inflation was causing generalized price hikes would be "a warning sign," that might require interest rate hikes, Macklem added.

A.Magalhes--PC