Bank of Canada holds the line

The Bank of Canada has held the line on interest rates, maintaining the trendsetting Bank Rate at 1.25%.

“The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated, although risks remain elevated,” the Bank said in a statement. Both the U.S. and Europe are recovering, while some emerging markets are moving to slow down their growth.

Slower growth in the emerging markets should lead to lower demand for industrial commodities, which in turn should help rein in the Canadian dollar.

“The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans.”

Domestic growth will be further constrained by increased consumer aversion to debt, while new mortgage rules announced on Monday should help to cool the residential real estate market.

“Overall, the Bank projects the economy will expand by 2.4% in 2011 and 2.8% in 2012 – a slightly firmer profile than had been anticipated in the October Monetary Policy Report,” the Bank said. “With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.”

The Bank anticipates increased business spending will drive growth, echoing a report released by CIBC World Markets on Monday. That report forecasted that the Bank of Canada will hold the line on interest rates at least until mid-year.