(Adds detail, comment from report)
OTTAWA, April 12 (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, saying that while growth has been stronger than it anticipated in January it is "too early" to conclude that the economy is on a sustainable growth path.
Reiterating its position that material excess capacity remains in the economy, the central bank nudged up its growth forecast for 2017 but lowered its projection for potential growth to reflect "persistently weak investment."
Taken together, the faster growth in 2017 and lower potential growth means the bank now projects the output gap to close in the first half of 2018, sooner than the mid-2018 timeline policymakers had predicted in January.
In a report that noted a weakness for every strength, the bank said business investment remains well below what could be expected at this stage in the recovery and wage growth remains subdued, while residential investment has been stronger than expected.
"The Bank's Governing Council acknowledges the strength of recent data, some of which is temporary, and is mindful of the significant uncertainties weighing on the outlook," the bank said in a statement accompanying its quarterly Monetary Policy Report.
Noting the red-hot Toronto housing market, which some economists have called a bubble, the bank said price growth in the area "seems to have entered a phase in which speculation is playing a larger role."
The bank has held rates steady since cutting twice in 2015, and the prolonged period of low interest rates has been blamed for helping inflate the housing market, particularly in Toronto, the nation's largest city.
The bank said housing activity has risen at a pace that "is unlikely to be sustained given the economic fundamentals" and listed rising household spending and debt as a key risk to its outlook. The debt-to-income ratio has risen to record highs as homebuyers take huge mortgages to get into the market.
The bank bumped up its forecast for average annual real gross domestic product growth to 2.6 percent in 2017, up from 2.1 percent forecast in January, but lowered the forecast for 2018 to 1.9 percent from 2.1 percent forecast three months ago.
While drivers of U.S. growth remain solid and Canadian job data has been robust, gains in hours worked are still soft, the Bank noted.
It said export growth has been uneven in the face competitiveness challenges and uncertainty surrounding possible U.S. protectionism that could hurt Canadian exports.