The Bank of Canada held rates steady on Wednesday, but slashed its growth outlook and pushed back the possibility of a rate hike in the near term thanks to 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.
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.
"There's still the desire for some modest withdrawal of monetary policy so higher rates. However, 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 bank says 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 2014.
Bank of Canada Governor Mark Carney, who will become the boss of the Bank of England in July, has been signaling since April 2012 that rates would likely go up, not down.
The new projections were released at the same time as the interest rate decision for the first time, and were more or less in line with market expectations of weaker growth and inflation. Many market observers believed the bank's growth outlook had been too optimistic.
"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.