The Bank of Canada will have to chart a cautious course for any future interest rate increases because of the slowing U.S. economy, governor Mark Carney said Friday.

Further rate hikes by the central bank could wind up reinforcing the adverse effects of an American economic stumble on the Canadian economy, he told a discussion panel.

"Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," Carney said at the Spruce Meadows Changing Fortunes Round Table, a conference in Calgary on global economic trends.

That echoed the central bank's statement Wednesday as it raised the target for its key overnight lending rate by 25 basis points to one per cent. Although that increase had been anticipated by analysts, economists now expect Carney to call a halt to further tightening.

North American drift

There are increasing signs of slowing gross domestic growth in the United States and Canada. In the second quarter of this year, Canada's GDP grew at a two per cent annualized rate, far below the 5.8 per cent clip the national economy achieved in the first three months of the year.Bank of Canada governor Mark Carney hinted Friday that the central bank will hold the line on interest rates in the coming months amid 'unusual uncertainty.' (CBC)

The Bank of Canada's policy of higher interest rates is designed to reduce inflationary pressures. But a slack economy essentially achieves the same goal — keeping a lid on price hikes — without higher borrowing charges, economists noted.

The bank governor generally does not issue declarative statements concerning future actions, leaving analysts to parse the meaning of his words, in this case the term "careful."

But many experts had already argued that the bank would hold the line at its next rate-setting meeting in October.

"In our opinion, the odds favour the Bank of Canada pausing for some time," commented Craig Alexander, chief economist at the TD Bank. "TD Economics does not anticipate another tightening before March of next year."

No big reforms needed

In his speech Friday, Carney stressed the need to allow existing global reforms to improve the world's financial system, as opposed to instituting new and potentially destabilizing policies.

Excessively risky lending practices wound up hammering financial institutions — and economies — in many countries during the recession that began in late 2008. As a result, some analysts and groups have called for a radical overhaul of the global banking system, something Carney said is not just unnecessary but could be harmful.

"There is no silver bullet; a constellation of policies across major economic areas is required," he said. "Faith is required, but not in a barbarous relic or a utopian global central bank. Rather, countries must restore their faith in the adjustment process under the current system."

In the face of an international clamour for tight control of commercial banks' operations, he warned that "it would be sheer incompetence to move from a world with a savings glut to one that is capital starved."