Interest rate hikes appear to be on the back burner for the foreseeable future after Bank of Canada governor Mark Carney said Thursday that overstretched households and weak U.S. demand would crimp economic growth in the coming months.

At a speech in Windsor, Ont., Carney said Canadians should brace for months of “modest” economic growth, acknowledging this will be reflected in the bank’s revised forecast to be released Oct. 20, in which third- and fourth-quarter estimates would be lowered. Any additional increases to interest rates in this environment would warrant “caution,” he added.

The remarks reinforced a growing belief among Bay Street traders that the odds of another rate hike this year were dwindling to nearly zero. Plus, data released Thursday indicated the economy contracted in July by 0.1% from June levels, the first monthly decline in almost a year.

Economists said Thursday’s speech and the GDP report point to a central bank that’s done with rate hikes for now.

“Mr. Carney is saying he’s willing to keep interest rates low for a while,” said Avery Shenfeld, chief economist at CIBC World Markets, adding the central bank is likely to stay on the sidelines until mid-2011. “Rates at these levels are stimulative, but perhaps we need that.”

In remarks to a Windsor business luncheon, Carney painted a portrait of a recovery that has lost momentum, and suggested the slowdown could be attributed to domestic factors — namely, consumers dragged down by their bloated balance sheets.

“Investment in housing has outstripped their total savings for over nine straight years. . . . This cannot continue,” Carney said.

The recovery’s early spurt, highlighted by annualized quarterly growth in the 5%-plus range, leaned heavily on people capitalizing on low interest rates to buy homes and consumer goods. “The limitations of this reliance are becoming evident,” Carney said, warning it appeared “unlikely” private consumption would be bolstered by further gains in housing prices.

Statistics indicate the ratio of household debt to disposable income hit a record high of 146% in the first quarter of 2010. But recent soft data on retail sales and housing activity suggest consumers have run out of steam.

Michael Gregory, senior economist at BMO Capital Markets, said the implications from household debt on growth represent the newest wrinkle in the bank’s outlook.

When it last raised rates on

Sept. 8, the central bank cited “exceptionally stimulative” financial conditions. But Gregory said the bank believes those conditions may be offset by an “inability or the lack of desire of consumers” to take on more debt.

Carney also called on federal policy-makers to “remain vigilant” about keeping household debt in check. Earlier this year, the federal government tightened rules to make it tougher for new homebuyers to get a mortgage following a series of warnings about the possibility of a housing bubble.