Bank of Canada sticks to guns on raising rates

OTTAWA, Sept 5 Wed Sep 5, 2012 9:00am EDT

OTTAWA, Sept 5 (Reuters) - The Bank of Canada doggedly stuck to its message on Wednesday that interest rates may have to rise because it expects the sluggish economy to gain momentum this year and next and inflation to return to target within a year.

The central bank held its key overnight rate at 1 percent, as expected, extending a two-year freeze on borrowing costs after it became the first Group of Seven (G7) country to lift rates from emergency lows in 2010 following the recession.

But as the U.S. Federal Reserve and other global central banks contemplate further rounds of easing amid a global economic slowdown, Canada insisted that the time for removing stimulus could be near.

"To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term," the bank said in its announcement, using language identical to its last two rate statements.

The bank judges the economy's underlying momentum to be roughly in line with its growth potential, which it has said is 2 percent. That is despite being held back by global headwinds and growing at an annualized rate of 1.8 percent in the second quarter. Growth will pick up through 2013, driven by consumption and business investment, it projected.

The bank sees core inflation, softer than expected in recent months, returning to its 2 percent target along with total inflation over the next 12 months since the economy is operating near its potential.

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