The Bank of Canada kept interest rates at 1 percent Tuesday after warning that the recession in Europe will be worse than expected.
Bank of Canada Governor Mark Carney said in a statement that monetary stimulation is needed to prevent the economic slowdown from worsening and spreading.
"Uncertainty around the global economic outlook has increased in the weeks" since the bank released its quarterly forecast in October," Carney said.
He noted that conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened, additional measures will be required to contain the European crisis.
Carney said the slowdown will be worsened by tighter credit, government spending cuts and reduced business and consumer borrowing in Europe.
He said U.S growth is also expected to be hampered by reduced spending by consumers who are trying to reduce the debts, spending cuts by governments and "negative spillover effects from the European crisis."
Carney added that growth in China and other emerging-market economies "continues to be strong, although there are signs that it is moderating to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening."
The central bank raised its target for the overnight lending rate to its current level from 0.75 per cent in September 2010.
The bank meets every six weeks to decide on its interest rate policy. The next meeting is scheduled for Jan 17.
It's the 10th consecutive policy meeting that the central bank has stood pat.
The bank's target for the overnight rate is the rate at which banks borrow for short-term loans. Many other interest rates in the consumer sphere are correlated to it, so it is the central bank's best weapon for heating up or cooling down the economy.