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UPDATE 1-Bank of Canada halves Q3 growth view, rate hike less imminent

Wednesday, 24 Oct 2012 | 2:47 PM ET

* Q3 growth projection cut to 1.0 pct from 2.0 pct

* BoC says more slack in economy than previously thought

* Projections suggest rate hikes less imminent

* Data revisions imply household sector more vulnerable

OTTAWA, Oct 24 (Reuters) - The Bank of Canada halved its forecast for third-quarter economic growth in Canada to 1.0 percent, annualized, on Wednesday and said the degree of slack in the economy had widened, suggesting rate hikes could come later than thought.

In its quarterly Monetary Policy Report, the bank also said indebted households in Canada - a top concern of policymakers - may be more vulnerable than it had thought.

The revised third quarter growth estimate was based partly on temporary disruptions in the oil sector, and the bank painted a brighter picture of the following two quarters. It forecast average growth of more than 2 percent through 2014 as foreign demand for Canadian exports recovers.

The economy is now running at two-thirds of a percent below its capacity, according to the bank's calculation, indicating a widening of the output gap from the second quarter, when the bank estimated it to be half a percent.

Canada recovered more quickly from the global financial crisis than other major economies and its central bank is the only one in the Group of Seven that is signaling an intention to raise interest rates amid expectations the economy will continue to expand moderately.

The central bank said on Tuesday it was still tilting toward rate hikes, a stance it has held since April but had been expected to soften.

The bank did suggest higher rates were less imminent than before, saying they were only likely to be ``over time.'' That softer stance reflected weaker third-quarter growth, softer underlying inflation and the larger degree of economic slack.

The bank also said recent historical revisions to the household debt-to-income ratio, raising it to 161 percent, implied ``a more vulnerable household sector than previously thought''.

It saw signs of overbuilding in the housing sector despite a decline in housing investment in the second and third quarters.

But the bank also said consumers may be beginning to be more cautious because of their heavy debt loads, and tighter mortgage rules introduced in June were expected to contribute to a more sustainable housing market.

Consumption and business investment will be the main drivers of growth between now and the end of 2014, the bank said.

It sees consumer spending growing by 1.0 percent this year and 1.2 percent next year, both unchanged from its July forecasts.