The Bank of Canada raised its key interest rate by 25 basis points to 0.75 percent on Tuesday, as expected, but cautioned that the domestic and global recoveries will be slower than previously expected in a hint that any further hikes may be gradual.
After lifting its overnight rate for the second straight month from emergency lows, the bank cut its domestic growth forecast for this year to 3.5 percent from 3.7 percent and said Europe's efforts to reduce sovereign debt would temper the pace of the global recovery as well.
Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments, the bank said in its rate announcement.
It cut its growth outlook for next year to 2.9 percent from 3.1 percent but raised its 2012 forecast to 2.2 percent from 1.9 percent.
The bank now sees the economy returning to full capacity by the end of 2011, two quarters later than it estimated in its April Monetary Policy Report.
However, inflation is behaving as it anticipated and will likely remain near the bank's 2 percent target through the end of 2012.
(Reporting by Louise Egan; Editing by Ka Yan Ng)