As expected, the Bank of Canada has held its key interest rate at one per cent, after three straight hikes.

The central bank, led by governor Mark Carney, said the economy has weakened since the bank's last forecast in July.

"The economic outlook for Canada has changed," the bank's senior officials wrote in a statement.

"At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered."

The economic recovery has not been as strong as thought, with next year's growth estimated to be at 2.3 per cent, down from its earlier estimate of 2.9 per cent.

"This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending," the bank said.

The country's economy will likely grow by three per cent this year, mostly due to a hot start.

The policy rate, which influences short-term interest rates offered by banks and other lending institutions, had been raised three times since June to the current level.

But with the Canadian dollar surging, the domestic economy slowing and global uncertainty still lingering, most economists expect Carney to keep the interest rate as is for the rest of the year.

The central bank said it will be a year longer than it previously estimated for the Canadian economy to return to full capacity. That won't happen until the end of 2012, the bank says.

Economists react

Canadian financial markets took a downward turn after the Bank of Canada's statement, with the loonie falling by more than two cents at one point in the day, before recovering slightly to close at US96.91.

Craig Alexander, the chief economist for TD Bank Financial Group, said the markets were responding to the "very sombre tone" of the bank's statement "that outlined exactly why the economic outlook is much more negative than they had previously anticipated."

He said the loonie is "getting buffeted about" by largely external factors, including China's decision to raise its interest rates and the decision by the U.S. to boost its money supply through a process known as quantitative easing.

Ian Lee, of Carleton University's Sprott business school, said the dropping loonie will be welcomed by Canadian manufacturers, who have been "very critical" of the high Canadian dollar as it pushes up the price of the goods they export.

However, Alexander said demand for Canadian exports will ease as a result of the weak U.S. economy.

While growth is quite low in the U.S., he said it is unlikely to slip into a major recession again.

However, Alexander said there remains a danger that governments could begin to pursue "competitive currency devaluations" (which were common during the Great Depression).

"I think that risk is still with us."