By Andrea Hopkins and Leah Schnurr
OTTAWA, Dec 6 (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, and reiterated its pledge to be cautious, but said more rate hikes will be required over time amid diminishing slack in the labor market and signs of inflation pressures.
Pointing to "very strong" employment growth, improving wages and robust consumer spending, the central bank left the official overnight rate at 1 percent but said it will likely add to its July and September rate hikes.
"While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation," the bank said.
The central bank said recent Canadian data are in line with its October outlook, though it noted inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gas prices. Measures of core inflation have edged up in recent months, reflecting the continued absorption of economic slack, it said.
"Meanwhile, despite rising employment and participation rates, other indicators point to ongoing - albeit diminishing - slack in the labor market," the bank said.
Analysts widely expect the bank to resume policy tightening in 2018, possibly as early as January, but uncertainty about the future of the North American Free Trade Agreement (NAFTA) has weighed on the outlook.
The bank said that while revisions to quarterly national accounts data have boosted GDP, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output.
It noted that business investment continued to contribute to growth after a strong first half to 2017, and said public infrastructure spending is becoming more evident in the data.
While exports declined more than was expected in the third quarter, the bank said the latest trade data support its projection that export growth will resume as foreign demand strengthens. U.S. growth in the third quarter was stronger than forecast but is expected to moderate in the months ahead.
In its sole nod to Canada's precarious housing market, the bank said "Housing has continued to moderate, as expected," and made no mention of recent record levels of household debt and looming mortgage rule changes, a focus of the bank's November Financial System Review.