The Bank of Canada has lowered its projection for economic growth in 2006, citing higher energy prices and slower productivity growth.

In a monetary policy update released today, the central bank said the economy is expected to grow by 2.9% next year, down from its July estimate of 3.3%.

In today’s update the bank said the economy was operating at full capacity throughout the second quarter.

The bank also revised its 2005 growth projection from 2.7% to 2.8% to reflect its belief that the economy is now operating at full capacity. For 2007, the bank estimates growth of 3.0%.

The central bank added that further interest rate hikes are likely in the next 12 to 18 months.

It gave no further hints of how much or how fast rates might be raised.

In its statement the bank said “robust final domestic demand” will continue to support economic growth through 2007.

“Business investment is expected to continue to increase strongly,” it said in its report. “Consumer spending should also continue to rise but at a somewhat slower pace than forecast in the July Update, partly because of higher energy prices.”

The bank lowered its 2005 growth forecast for the U.S. economy from 3.7% to 3.5%, blaming higher energy prices and the damage caused by hurricanes Katrina and Rita.