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Bank of Canada downgrades economy, keeps 1% interest rate in place

The Bank of Canada is keeping its trend-setting interest rate at one per cent, but now says the economy is growing more slowly than previously thought and will take longer to fully recover.

The dovish report from the central bank is expected to put downward pressure on the loonie, which has been showing signs of life in recent weeks.

The change in the outlook reflects what the Bank of Canada says is a slower growth path for the world and the U.S. following the setback at the start of the year that saw the American economy shrink by 2.9 per cent.

Growth has resumed, the bank says, but not sufficiently to reverse what has been lost.

For Canada, that means growth of 2.2 per cent this year and 2.4 next, both one-tenth of a point less than projected in April.

In another change from the bank’s monetary policy report in April, it no longer stresses risks to low inflation.

As well, it says the economy won’t return to full capacity until sometime in mid-2016, or two years from now. It was not long ago that the bank assumed the economy would be firing on all cylinders by mid-2015.

One positive in the bank’s report is that it expects Canada’s housing market to ease toward a soft landing, and that household finances will stabilize.