Source: The Canadian Press

The Bank of Canada is keeping short-term interest rates where they are until at least next year, saying the economy is taking a beating from the high dollar and low productivity.

The bank’s trendsetting rate has sat at 1% since October following three successive hikes that had put Canada out on a limb as the only G7 country to shift from economic stimulus to a policy of monetary tightening.

But recently the economy has not progressed as bank governor Mark Carney thought it would _ growth fell significantly short of his forecast both in the second quarter and most recently in the third quarter.

“The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the bank projected in its October monetary policy report,” the bank said in a statement.

“This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of next exports,” it added.

The bank had forecast a very weak 1.6% growth rate in the July-September period but the economy failed to even clear that low bar, eking out a meagre 1% advance.

Meanwhile, employment growth has slowed to a crawl since June, falling behind the pace it would need to keep up with population growth.

The third quarter did see a better-than-expected bump from consumer spending, the bank said, but a steep drop-off in net exports, on which Canada’s goods producing manufacturing sector depends, slowed growth.

Statistics Canada reported two weeks ago that the third-quarter current account deficit had hit a record $17.5 billion, with net trade slicing 3.5 percentage points off gross domestic product growth.

Meanwhile, the global situation is bubbling with risks, Bank of Canada governor Mark Carney added, led by concerns the European sovereign debt crisis could trigger a renewal of problems in financial markets. As well, the U.S. remains weak and even growth in emerging markets like China has slowed.

“Reflecting all of these factors, the bank has decided to maintain the target for the overnight rate at 1%,” Carney wrote in a statement, adding that “any further reduction in monetary stimulus would need to be carefully considered.”

The statement accompanying the interest rate decision was shorter than normal, suggesting Carney may be preparing for another downward revision on his projections for the economy on Jan. 18, the next scheduled policy announcement date.