The Bank of Canada held its key overnight interest rate steady at one per cent Tuesday warning the effects of a weakening global economy will eventually slow growth in Canada.
The overnight rate is the benchmark for bank prime lending rates and affects the cost everything from lines of credit, some mortgages to business loans.
The decision didn't come as a surprise to most economists who predict rates will remain at record lows for at least another year.
"Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened," the bank stated.
Standard & Poor's has put 15 of 17 eurozone countries, including Germany and France, on notice for a possible credit downgrade, adding to pressure on world markets. China also faces slower growth and the U.S. economy remains weak.
Despite the bank's cautious approach, it did note Canada's economy was doing slightly better in the second half of 2011 with gross domestic product in the third quarter one point higher than its two per cent call.
Canada's exports have surprisingly posted solid gains even with a high dollar, while household spending and business investment is showing strength.
Inflation is higher than the bank would like at 2.9 per cent, but it expects food and energy prices to stabilize bringing overall inflation closer to its target of two per cent.
Meanwhile, an RBC Economics outlook released Tuesday predicts Canada's economy will grow by 2.5 per cent next year, based partly on the assumption European leaders will contain the debt crisis.
RBC's chief economist Craig Wright credited the central bank's flexible stance on interest rates, historically high commodity prices and continued U.S. growth as factors keeping Canada's economy on a solid footing.
