Bank of Canada cuts growth forecast, warns again of higher rates

Wed Apr 17, 2013 2:55pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada chopped its economic growth forecasts and welcomed signs of a cooler housing market on Wednesday as it left its benchmark lending rate unchanged and said it still expects its next move on interest rates to be up.

The central bank, the only one in the Group of Seven (G7) leading industrialized nations hinting at higher rates, held its main rate at 1 percent, where it has been since September 2010.

In the last Monetary Policy Report it will issue before Governor Mark Carney leaves to head the Bank of England in July, the bank sharply downgraded economic growth expectations and suggested that slack in the economy was still building.

It cut its 2013 growth outlook to 1.5 percent - the same as an International Monetary Fund forecast - from the 2.0 percent it saw in January. It forecast 2.8 percent growth in 2014.

Nonetheless, the central bank said it still expects interest rates to rise, repeating that after a period of time "some modest withdrawal" of monetary stimulus would likely be required.

Some analysts had speculated the central bank could water down or drop language about raising rates as the economy slows.

But Carney told reporters it is important to look at the context, including the fact that the benchmark rate is low, and the financial sector is functioning very well.

"There is slack in the economy. We call it material slack, but it's not that big, and it's certainly not that big relative to other major economies," Carney told a news conference.   Continued...

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie