The momentum in the Canadian economy is stronger than predicted earlier this year, the Bank of Canada said Wednesday, though it still faces strong headwinds in the form of high household debt levels, a strong dollar and a weak export market.

In its quarterly Monetary Policy Report, released Wednesday, the bank said its outlook for economic growth both around the world and in Canada is stronger than predicted back in January.

Based on its new outlook, the bank projects the Canadian economy will grow by 2.4 per cent in 2012 and 2013, and 2.2 per cent in 2014. The bank predicts that Canada's economy will return to full capacity in the first half of 2013.

"Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January," Carney told reporters at an Ottawa news conference.

"The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business and household confidence are improving faster than forecast in January."

Speaking to reporters in Toronto Wednesday, Finance Minister Jim Flaherty said the Bank of Canada's projections are similar to the government's financial forecast.

In order to further stimulate the economy, Flaherty said Ottawa will continue to "encourage and support" public-private partnerships, such as those between Canada's post-secondary institutions and businesses in the corresponding sector.

"We want to create innovation, to create commercialization…which means jobs, growth and prosperity in the country," Flaherty said.

The Bank of Canada continues to sound the alarm, however, over the growing household debt burden, "which remains the biggest domestic risk."

Recent data suggests that consumer debt levels are at a record high of 151 per cent of disposable household income.

The bank sounded the alarm in particular over the growing use of home-equity lines of credit and mortgage refinancing. The report said the amount of equity extracted via home-equity lines of credit has grown from $8 billion in 2001 to $64 billion in 2010.

Carney said home equity lines of credit can serve a positive purpose, such as when they are used to refinance high-interest credit-card debt at much lower rates.

"The issue, as with any debt, is if these innovations, effectively this access to debt, are taken too far," Carney said.

Avery Shenfeld, CIBC's chief economist, said Canadians have been listening to Carney's past warnings and refraining from running up their credit card bills and taking out large personal loans.

However, home equity lines remain "the cheapest way for Canadians to borrow," and the economy has actually benefitted from that over the past couple of years as it emerged from the 2008 global recession, Shenfeld told CTV's Power Play.

"Remember, the Canadian economy needed us to borrow…and Canadians have been stepping up to the plate and doing that," he said.

Carney's report points out that Canadians who have less equity in their homes will leave themselves exposed should there be a decline in house prices, which is possible when record-low interest rates inevitably rise.

On Tuesday, Carney decided to keep the overnight lending rate at 1 per cent. However, he appeared to signal his intention to gradually start lifting rates, which economists warn will put the squeeze on overburdened households.

"My reading is that they wouldn't have given us a warning if they didn't think they would raise rates before the end of the year," Shenfeld said.

However, he said, "if the global economy disappoints, if Canadians aren't this aggressive in spending, then (Carney) will have to dangle those interest rates in front of our eyes a bit longer to keep the economy moving."

Wednesday's report outlines other potential drags on the momentum of the Canadian economy, including the skyrocketing international price for oil, which "has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum."

It also expects Canada's export market to remain weak in the face of "modest" external demand and other challenges, including the continued strength of the loonie.

And the report makes note of the "persistence of unused capacity in the labour market," noting that both the employment and unemployment rates are little changed from six months ago.

Flaherty said Canada remains committed to social programs despite the government's recent changes to the Old Age Security program, which raised the age of eligibility to 67 from 65.

"We need to be realistic about this," he said.

Meanwhile, the Bank of Canada predicts inflation to remain steady at about 2 per cent. However, upside risks include the possibility of higher-than-expected oil prices, stronger-than-expected growth in the U.S. economy and further momentum in household spending.