By Julian Beltrame
The Canadian Press

OTTAWA – The Bank of Canada is keeping its trendsetting policy interest rate at a super-low one per cent until at least March, which it admits will foster a continued rise in household debt from already historic highs.

The central bank’s decision on interest rates Tuesday was widely expected, but it did unveil a few new twists in its release, including a slightly altered profile for economic growth and an admission its policies will likely keep Canada’s housing market strong and spur consumer spending.

“Very favourable financing conditions are expected to buttress consumer spending and housing activity,” the bank’s policy council, headed by governor Mark Carney, said in its announcement.

“Household expenditures are expected to remain high relative to GDP (gross domestic product) and the ratio of household debt to income is projected to rise further.”

Carney has warned repeatedly that Canadians are taking on too much debt, lured by the super-low interest rate policy, but the concession that he expects debt to increase suggests he has become resigned to the fact for the time being. According to Statistics Canada, household debt to disposable annual income is already at an all-time high of 153 per cent.

Last week, the Bank of Montreal led a race to the bottom on interest rates by dropping its fixed five-year mortgage to 2.99 per cent, the lowest in modern Canadian history.

As analysts have noted, Carney is in a bind on interest rates, in that he wants to discourage irresponsible borrowing that might lead to difficulties later on but is restrained by an economy that is too weak and too risk-filled to withstand a policy clampdown on borrowing by consumers and businesses.

In the statement, the bank made clear it believes the global economy is even weaker and riskier now than it was when it issued a rather gloomy assessment in October.

“The sovereign debt crisis has intensified, conditions in international financial markets have tightened and risk aversion has risen,” the policy council wrote. “The recession in Europe is now expected to be deeper and longer than the bank had anticipated.”

The bank said it assumes European authorities will do what is necessary to contain the crisis, but admits “this assumption is clearly subject to downside risks.”

For Canada so far, European troubles, including weaker growth in China, has not materially altered the outlook.

It said the second half of 2011 was better than it had previously thought with growth of 2.4 per cent, three notches higher than its October projection. That was in part because the U.S. economy was also stronger.

For this year, however, growth will average one notch higher at 2.0 per cent and in 2013, one notch lower than the previous forecast at 2.8 per cent — in essence, little changed.

The bank has repeatedly stressed, however, that its mild forecast for Canada is contingent on the European debt contagion not spreading and that risk appears to have grown, in the bank’s assessment.

The higher starting point on growth because of the stronger 2011 will mean the output gap — the measure of when the economy is running on all cylinders — will close three months earlier, in the fall of 2013, the bank said.

And the bank believes inflation this year will be slightly higher because of the continued firmness in oil prices. In October, the bank had projected inflation would drop below one per cent by summer.

But the bank is clearly not worried about consumer prices, forecasting inflation will hit its target of two per cent in the third quarter of 2013.

“Inflation expectations remain well-anchored,” it said.