Canada's central bank holds key lending rate at 1%

Canada's central bank held its key lending rate at one percent on Wednesday, citing "continued slack" in the Canadian economy and a "muted outlook" for inflation.

After overestimating a rebound last year, the Bank of Canada more cautiously forecast that growth will pick up through 2013, supported by "modest" consumer spending combined with more business investment and a recovery in exports.

The expected recovery in exports, however, is likely to remain below the pre-recession peak until late 2014, owing to restrained foreign demand and a persistently strong Canadian dollar, it said.

The bank noted that US private sector demand is gaining momentum, but warned of a "fiscal drag" over the next two years "likely to be more front-loaded as a result of sequestration cuts."

The recession in Europe continues, it noted. But growth in China has improved. And other major emerging economies are expected to benefit from policy stimulus.

The bank also predicted a further decline in Canadian residential investment from historically high levels, and Canadians' debt-to-income ratio stabilizing near current levels.

Reflecting these factors, it said near-record low interest rates "will likely remain appropriate for a period," after which a "modest withdrawal" of monetary policy stimulus would help it reach its two percent inflation target.