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Bank of Canada says Europe crisis barely contained

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The Bank of Canada will keep its key interest rate at its current low 1 percent, in part because the European debt crisis "appears barely contained," Governor Mark Carney said Wednesday.

The central bank chief said that as recently as July, markets had been expecting the central bank to raise rates soon. But since then the Canadian economy had been hit by several shocks, in particular Europe's debt woes.

"European authorities have announced important plans to provide time to refound their monetary union, but acute strains persist. At this point, the crisis appears barely contained," he said in the prepared text of a speech to be made in Montreal.

Carney -- the new head of the G20's regulatory Financial Stability Board -- also cited what he said would be subdued inflationary pressures next year, the result of slower growth and a reversal in the sharp increases in food and energy prices.

"In this environment the bank judges it appropriate to maintain the considerable monetary stimulus in place," he said.

"The stimulus has been further enhanced by the sharp fall in global risk-free yields, which is providing further support to the Canadian economy through our well-functioning financial system," he continued.

He made no mention of when or how the bank would next change interest rates.

Carney said preliminary evidence suggests annualized economic growth in the second half of the year would be slightly stronger than the 1.4 percent the Bank of Canada forecast last month.

In October, the bank said annualized growth in the third quarter would be 2.0 percent, dropping to 0.8 percent in the fourth quarter.

Carney said the bank continued to expect excess supply to persist well into 2013, and said this - combined with the reversal of food and energy price increases - would push the overall inflation rate to the bottom of the bank's 1 to 3 percent target range by the middle of 2012.

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