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Bank of Canada says medium term outlook brighter, holds rates steady

FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa

OTTAWA (Reuters) - The arrival of a COVID-19 vaccine and stronger foreign demand is brightening the outlook for the Canadian economy in the medium term, the Bank of Canada said on Wednesday, as it held its key overnight interest rate at 0.25%.

But the central bank warned the near-term would be choppy, with an economic contraction forecast for the first quarter of 2021, and inflation not expected to return sustainably to target until 2023, which will keep interest rates at record lows.

"The recuperation in the Canadian economy is now more secure, and medium-term growth is forecast to be stronger," the central bank said, as it outlined its quarterly economic forecasts.

"Nevertheless, considerable economic slack remains in the economy, and a complete recovery will take some time."

The Canadian dollar extended gains, touching 1.2676 to the greenback, or 78.89 U.S. cents, after the rate decision.

The Bank expects the Canadian economy to contract 2.9% in the first quarter of 2021, with full year economic growth now forecast to be 4.0%. Economic activity is expected to return to pre-pandemic levels in late 2021, slightly sooner than forecast in October.

The Bank of Canada also revised up its growth forecast for 2022 to 4.8% and forecast 2.5% GDP growth in 2023.

(Reporting by Julie Gordon and David Ljunggren in Ottawa, additional reporting by Fergal Smith and Steve Scherer; Editing by Kirsten Donovan)