April 24 (Bloomberg) -- The Bank of Canada predicted tightness in credit markets until 2010, and said the shortages will combine with a slump in exports to the U.S. to cause the slowest economic growth in 16 years.

``The Canadian economy has been directly affected by the downward revision to the economic outlook in the U.S. and by the continuing strains in credit markets,'' the Ottawa-based central bank said in its Monetary Policy Report. ``Some further monetary stimulus will likely be required,'' the report said, adding investors expect another quarter point cut this year.

Governor Mark Carney, who holds a press conference at 11:15 a.m. New York time, cut the benchmark rate half a point to 3 percent Tuesday to ease commercial lending while markets recover from the subprime mortgage meltdown in the U.S. The move also helps factories cope with weak U.S. demand and a high currency that makes their goods less competitive abroad.

Output will grow 1.4 percent this year, the bank said, the slowest since 1992 and less than a January prediction of 1.8 percent, as the ``export drag'' offsets the domestic spending that's powered the economy in recent years. Growth will quicken to 2.4 percent next year and 3.3 percent in 2010, as inflation returns to policy makers' 2 percent target.

While inflation is creeping higher in other countries as energy and food costs rise, prices are being restrained in Canada by the currency's effect on imports and competition among grocery stores, the central bank said. Risks to the inflation projection are ``balanced,'' the bank said.

Credit Markets

Canada will weather the credit woes better than other industrialized countries because banks and consumers were in better financial shape beforehand, the central bank said. Also, subprime mortgages were less common than in the U.S. and unemployment is close to a three-decade low, the bank said.

``Credit availability will remain more robust in Canada than in other major markets,'' according to today's report.

Lenders are paying more to raise their own funds, and the central bank said it assumes those costs ``will be passed on and that tighter credit conditions will persist through 2008.'' Credit conditions will improve through 2009 before they ``stabilize'' in 2010, the report said.

The Bank of Canada, on its own and in tandem with counterparts in the U.S. and Europe, has pumped billions of dollars into the financial system, accepted new collateral on loans and sought wider powers to mitigate problems in markets.

The central bank bought C$2 billion of securities for 28 days on April 17 to help markets function. Policy makers made four similar purchases starting in December, when they acted with U.S. and European counterparts to try to restore order.

The International Monetary Fund said this month that global losses stemming from the subprime collapse may run up to $1 trillion.

Subprime Fallout

Canada started putting cash into the banking system on a regular basis last August, as banks all over the world restricted lending and some Canadian asset-backed commercial paper stopped trading.

Today the U.S. Federal Reserve is lending $75 billion of Treasuries to so-called primary dealers who work directly with the Fed's New York branch. The loans under the Term Securities Lending Facility aim to ease strains in financial markets.

The U.S. economy probably ``stalled'' in the first quarter and will ``decline marginally'' in the first half of this year, the Bank of Canada said today.

Canada sends about three-quarters of its exports to the U.S. and the economic crisis there has sapped demand for Canadian lumber, cars and other manufactured goods.

The Canadian dollar hit a record 90.58 Canadian cents per U.S. dollar on Nov. 7, curbing exports to the U.S.

The central bank today kept its January assumption that the currency will trade for an average C$1.02 per U.S. dollar, supported by global prices for energy and metals.

The report also said ``market expectations'' are for the Bank of Canada to lower borrowing costs by another quarter point this year, while saying the timing of more ``stimulus'' would depend on global and domestic economic developments.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: April 24, 2008 10:30 EDT