UPDATE 1-Bank of Canada cuts Q3 growth forecast as exports sluggish
* Macklem sees growth range of 2-2.5 pct for Q3 and Q4
* Says rates stay low to aid export, investment recovery
* Says growth of 2.5 pct needed to absorb economy's slack
TORONTO, Oct 1 (Reuters) - The Bank of Canada cut its third-quarter economic growth forecast sharply on Tuesday and said the crucial export sector might pick up speed more slowly than it expected.
Senior Deputy Governor Tiff Macklem said the central bank now expects annualized growth in the third and fourth quarters to be in the 2 to 2.5 percent range before strengthening next year. In its monetary policy report released in July, the bank said third-quarter growth would be 3.8 percent and fourth-quarter growth would be 2.5 percent.
"Near-term growth now looks a little less choppy than initially projected," Macklem said in the prepared text of his speech.
The bank's July projections overestimated the second-quarter impact of severe flooding in Alberta and a construction strike in Quebec, both in June, on growth. The economy grew 1.7 percent in the second quarter, compared with the bank's estimate of 1 percent.
The bank will publish more detailed forecasts in its next quarterly update on Oct. 23.
Macklem told a Toronto audience that a predicted shift in demand toward exports and business investment - important to help ensure a healthier economic growth rate and reduce reliance on consumer spending - had proved elusive.
"There is a risk that this rotation is delayed further," he said.
Canada recovered quickly from the 2008-09 recession, largely due to strong consumer spending and a housing boom. But with the household debt-to-income ratio at a record high because of low interest rates, policymakers are eager to see consumers take a backseat while businesses, particularly exporters, pick up the slack.
The bank has kept its key interest rate unchanged at 1 percent, a near record low, since September 2010, and Macklem gave no hints of a hike in the near future.
"With inflation subdued, monetary policy remains highly stimulative to provide time for the recovery in exports and investment to take hold," Macklem said.
Forecasters in a Reuters poll conducted in August predicted the bank would begin raising rates in the fourth quarter of 2014.
Macklem said the economy must grow by at least 2.5 percent to absorb its excess slack. The bank expects, in general, household and government spending combined to contribute about 1.5 percentage points of growth.
To reach the required 2.5 percent growth, net exports and investment would need to contribute at least 1 percentage point.
"That means together exports and investment need to grow by at least about 4 percent after taking into account their import content," Macklem said.
In the past year, net exports and investment in fact contributed nothing to growth, he said.