The soaring Canadian dollar is sapping strength from the export-led recovery and economic growth prospects were facing a downgrade if not for the fiscal stimulus in the federal budget, the Bank of Canada said Wednesday.

While the bank held its key overnight rate at 0.5 per cent, its Monetary Policy Report sounded a much more dovish tone on the economy than that of Bay Street economists.

It's the kind of outlook that could have put another rate cut on the table, if not for the Liberal government’s helping hand.

The Bank of Canada now sees the economy growing 1.7 per cent this year, up from 1.4 per cent, thanks to fiscal stimulus. But the Bank marked down next year's growth from 2.4 to 2.3 per cent, even with fiscal stimulus baked in.

Private-sector economists have been targetting two per cent growth in 2016 after a strong start to the year.

The Bank of Canada cautioned Wednesday that a higher Canadian dollar, slower foreign demand growth, and another significant downleg in business investment are dragging down growth prospects.

The loonie has gained some 10 cents against the U.S. dollar since the lows of January. The Monetary Policy Report forecasts a 76-cent loonie over the next two years, up from the 72-cent average it previously projected.

"Non-commodity exports are expected to increase solidy," the Bank writes in the report.

Still, "the profile is somewhat lower relative to January's projection, given the downward revision to external demand and the higher assumed level for the Canadian dollar."

And while the economy is creating jobs in the face of the oil shock, the Bank says productivity will be depressed as the country shifts from higher-productivity jobs in the oil patch to service-sector positions.

In all, a very cautious outlook for Canada's economy despite a strong first quarter.

The Bank estimates real GDP grew 2.8 per cent for the first three months of the year, but sees that cooling significantly to one per cent in the second quarter.

The reason: slowing activity in exports and household spending.

While the Bank now sees exports contributing 1.1 percentage points to growth this year, up from the 0.9 per cent forecast in January, the export contribution plunges to 0.9 percentage points in 2017, from the 1.7 per cent previously forecast.

Meanwhile, business investment, the Bank says, will "likely decline sharply for a second year in a row, to about 60 per cent below its 2014 level."

Oil has rallied well off its 2016 lows, but the Bank is cautious on that front as well. It assumes West Texas Intermediate will remain near US$38 a barrel, adding the price level needed to balance the market "remains highly uncertain."

Weakness in the Bank's global demand outlook stems from its markdown of growth prospects for the U.S. and the world.

It sees the American economy growing two per cent this year and 2.1 per cent in 2017, down from previous forecasts of 2.4 per cent in both years.

And global growth, the Bank forecasts, will come in at three per cent this year and 3.4 per cent in 2017, down from 3.3 and 3.6 respectively.

While the higher dollar, plunging business investment and weaker foreign demand will weigh on Canada, the Bank sees the economy returning to potential earlier than expected.

It now sees the output gap closing in the second half of 2017, thanks to fiscal stimulus.