Low interest rates will remain the norm for longer than anticipated, the Bank of Canada signalled Wednesday as it lowered growth expectations for 2013, citing global and domestic economic challenges.

Governor Mark Carney held the key overnight interest rate steady at 1 per cent on Wednesday, saying Canada's economy experienced more of a slowdown than expected in the second half of 2012, and going forward "economic activity is expected to be more restrained."

"The Bank now expects the economy to reach full capacity in the second half of 2014, later than anticipated in October," Carney said, reading from the bank's quarterly Monetary Policy Report.

The bank also revised its 2.3 per cent growth estimate for 2013 down to 2 per cent, followed by an expected 2.7 per cent in 2014.

Carney didn't say when the bank expects to raise its overnight lending rate, noting only that while “the direction is clear, the timing has shifted.”

He said some "modest withdrawal" of stimulus is expected though any such move is "less imminent than previously anticipated."

"We'll adjust monetary policy, including guidance, as appropriate in order to meet our (2 per cent) inflation target," Carney told reporters.

The overnight interest rate has remained at one per cent for nearly two-and-a-half years.

Bank of Montreal economist Doug Porter said Wednesday a rate hike will likely be put off until 2014.

"The prior reason for the seeming disconnect between the tough talk and a squishy soft economy was the bank's laser-like focus on the build-up in household debt," Porter said.


"With the bank now sending some fairly strong signals that it thinks the path for household debt is moderating meaningfully, the case for rate hikes has receded accordingly."

The bank's statement said global economic winds continue to buffet the Canadian economy. Growth in the U.S. has been restrained by uncertainty around fiscal cliff negotiations, while Europe remains in recession and economic recovery there appears further off than it did in October.

China's economic growth remains a bright spot, the bank said, though some other major emerging economies are experiencing further slowdowns.

Domestically, the bank said weaker business investment and exports resulted in slower-than-forecast growth in the second half of 2012.

High debt levels -- which Carney has warned Canadians to be wary of in recent months -- also resulted in restrained household spending, the statement said.

However, Carney signalled Wednesday that the bank is reassured by signs that household debt levels are stabilizing at 165 per cent of disposable income.

The bank also noted signs of a cooling housing market, which will also help keep household debt in check as fewer Canadians look for mortgages. But the bank warned of negative economic consequences if the bottom falls out of the housing market.

"If there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy," the bank warned.

The bank expects Canada's economic growth to pick up in 2013, though exports will remain below pre-recession levels until 2014, largely due to faltering international demand and the ongoing strength of the Canadian dollar.

"Business investment and exports are projected to rebound as foreign demand strengthens, uncertainty diminishes and the temporary factors that have weighed on resource sector activity are unwound," the statement said.

The central bank said core inflation in Canada has softened more than expected, sitting at around 1 per cent, where it is expected to remain for the "near term" before rising to the target rate of 2 per cent in the second half of 2014.