07/18/2012 01:27 EDT | Updated 09/17/2012 05:12 EDT

Bank of Canada predicts higher interest rates by 2014

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

Its warning came as many 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 manufacturing sector 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 month by 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, who heads 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 Canadian households. The bank says they should expect to see their debt load grow in the coming months despite the government's move to tighten mortgage rules.

It said there are signs of "overbuilding" in the housing market.

Statistics Canada hasn’t reported yet on GDP growth in the second quarter of the year, but the bank predicted that the economy will have expanded by only 1.8 per cent.

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

The bank also lowered its assumption for the future prices for crude oil, Canada's leading commodity export.

It cut 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.

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.

Europe’s 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 committee kept the rate at one per cent and lowered its forecasts for Canadian growth in 2012 and 2013.

Yesterday was the 15th consecutive time the bank had decided to neither raise nor lower its rate.

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