The Bank of Canada held rates steady on Wednesday, but slashed its growth outlook and highlighted the need to push back the possibility of a rate hike due largely to a wider output gap, stabilizing household debt and muted inflation.
As expected, the bank kept its benchmark interest rate on hold at 1.0 per cent where it has been frozen since September, 2010 -- the longest pause since the 1950s.
The central bank said the economy is expected to grow by 2.0 per cent this year, down from 2.3 per cent forecasted in October. In 2014, the economy is forecasted to grow 2.7 per cent.
"While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated," the bank said in a statement.
All those factors "push back the need for any potential adjustment, any potential tightening, but that is still the ultimate direction," said Bank of Canada Governor Mark Carney.
"Over the projection horizon, the expectation is that some modest withdrawal of monetary stimulus may be required. So the direction is clear, the timing has shifted," he told reporters in a press conference on Wednesday.
Carney, who will become the boss of the Bank of England in July, has been signaling since last April that rates would likely go up, not down.
Camilla Sutton, chief currency strategist at Scotiabank, characterized the bank's statement as slightly more dovish.
"The tone of their statement has been pared back slightly," she said.
"The timing of that has been pushed out really because the fears that they had over household debt or imbalances has abated somewhat. As well, the inflation environment in Canada is very contained."
The central bank said the economy is expected to grow by 2 per cent this year, down from 2.3 per cent forecasted in October as global and domestic growth was less robust than expected. In 2014, the economy is forecasted to grow 2.7 per cent.
The bank said it expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels. Last summer, Ottawa tightened mortgage rules in an effort to cool Canada's once-hot housing market and help Canadians get a grip on ballooning debt levels.
The bank also said it does not expect the economy to hit full capacity until the second half of 2014, later than previously thought, and that inflation is expected to remain around 1 per cent in the near term before rising gradually, along with core inflation, to the 2 per cent target in the second half of next year.
The new projections contained in the bank's Monetary Policy Report were released at the same time as the interest rate decision for the first time.
"Overall a dovish report and statement, which reinforces our view that the bank will remain on the sidelines until early 2014," Peter Buchanan, an economist with CIBC World Markets, said in a research note immediately after the releases.