Bank of Canada predicts higher interest rates by 2014

Bank of Canada governor Mark Carney defended Canadas policy of considering higher interest rates Wednesday, after the bankprojected a gradual rise in its key lending rate through 2014.

Its warning came asmany advanced economies are thinking about stimulus, but Carney told a news conference"global economic policy is not cut-and-paste."

The bank made the prediction in its latest Monetary Policy Report released earlier in the day.

Carney also predicted weakness in Canada's manufacturingsector will likely continue "for some time," because the country exports so much to low-growth economies.

Carney said 85 per cent of our exports go those countries, especially the U.S., and the outlook for those is to continue to grow slowly for an extended period.

He also described as "deeply troubling" the facts emerging about manipulation of the global interest rate benchmark known as LIBOR, or London Interbank Offered Rate.

UK lender Barclays was fined $453 million US earlier this monthby U.S. and U.K. financial authorities for manipulating LIBOR between 2005 and 2009. Barclays' chief executive Bob Diamond resigned as a result of the scandal and chairman Marcus Agius says he will go once his successor is chosen.

Carney says he has held talks with global officials on how to fix the way LIBOR is set each day and will take up the matter in September at the next meeting of the Financial Stability Board.

Carney, whoheads the Swiss-based FSB, says he agrees with his U.S. counterpart ,Ben Bernanke, that the process for setting LIBOR is structurally flawed.

The monetary policy report also had a warning for Canadianhouseholds. The bank saystheyshould expect to see their debt load growin the coming months despitethe government's move to tighten mortgage rules.

It said there aresigns of "overbuilding" in the housing market.

Statistics Canada hasnt reported yet on GDP growth in the second quarter of the year, but the bank predicted thatthe economy will have expanded by only 1.8 per cent.

Thats seven-tenths of a point slower than it thought would be the case in April.

The bank also lowered its assumption for thefutureprices for crude oil, Canada'sleading commodity export.

Itcut its projected price range for the second half of this year and through 2013 from mostly above $100 US to the high-$80s US.

It says business investment and consumer spending, supported by super-low interest rates, remain as the main support systems for the recovery, although both are weaker today than they were projected to be.

Meanwhile, housing, exports, and government activity are contributing little and in some cases acting as a drag on growth.

'This outlook for the Canadian economy is weaker over the near term than anticipated.' Bank of Canada Monetary Report

The bank is calling for growth in the Canadian economy of 2.1 per cent in 2012, 2.3 per cent in 2013 and 2.5 per cent in 2014.

"This outlook for the Canadian economy is weaker over the near term than anticipated," the bank report states.

"As a result, the Canadian economy is expected to continue to operate with a small amount of slack for somewhat longer than previously anticipated," and will not return to full capacity until the second half of next year.

The bank says business investment and consumer spending, supported by super-low interest rates, remain the chief support systems for the recovery.

Even so, both will contribute less to growth than previously projected. Consumer credit continues to slow, but remains above income growth. Business investment will also be less robust than expected due to concerns about the global economy.

Europes continuing debt crisis points to a renewed contraction, it says, and in China and other emerging economies, the slowdown in growth has been greater than anticipated.

Yesterday, the bank's monetary policy committeekept the rate at one per centand lowered its forecasts for Canadian growth in2012 and 2013.

Yesterday wasthe 15th consecutive timethe bankhad decided to neither raise nor lower itsrate.

The central bank's rate is the one upon which retail banks base their interest rates for loans and investments.