Bank of Canada governor Mark Carney Oct. 23, 2008 (CBC)

Canada's economic performance is expected to be sluggish through the first quarter of next year, the country's central bank said Thursday.

In its Monetary Policy Report, the Bank of Canada said growth is expected to pick up over the remainder of 2009 and to shoot to "above-potential" in 2010, as credit conditions improve and interest-rate cuts take hold.

The bank said it sees GDP growth of 0.6 per cent in 2009. That is forecast to rise to 3.4 per cent in 2010.

Earlier this week, the bank cut its target for the overnight rate by one-quarter of a percentage point to 2.25 per cent, and hinted that more rate cuts will be likely.

"In line with the bank's new outlook, some further monetary stimulus will likely be required to achieve the two per cent inflation target over the medium term," said Bank of Canada governor Mark Carney.

Asked if Canada was headed for recession, Carney would only say that economic performance will be sluggish for the next few quarters.

The bank said three major factors have been battering the Canadian economy, including:

• The strains on financial markets caused by the growing credit crisis.
• The fact the global economy appears headed for a mild recess led by the U.S., which it said is already in recession.
• Falling commodity prices.

The recent drop in the Canadian dollar will also help to offset weaker global demand and lower commodity prices, the central bank said in its report.