MONTREAL (Bloomberg) — Bank of Canada Governor Mark Carney said while domestic banks are faring well amid the crisis in US financial markets, demand for Canada's products may drop more than anticipated and inflation may slow.

"The current situation poses particular problems" because it affects "areas that matter most for Canada," such as demand for cars and lumber, Carney, 43, said in a speech yesterday at the Canadian Club of Montreal.

Policy makers had already identified tighter credit conditions "as the main risk to a modest US recovery next year," and recent events make that possibility "more probable," he also said.

Economic growth will slow to one percent this year, the least since 1992, the Bank of Canada said in a July forecast that it will revise next month. Central bankers left the benchmark lending rate unchanged at three percent on September 3. The next decision is scheduled for October 21, followed by a quarterly forecast two days later.

Carney also noted that prices for commodities such as energy products are falling, a trend the central bank sees as "a downside risk for the outlook for inflation in Canada."

A combination of slower growth and inflation might prompt the central bank to cut its benchmark lending rate by year-end, as predicted by economists such as David Wolf, chief strategist at Merrill Lynch & Co. in Toronto.

Policy makers will likely cut borrowing costs by the end of the fourth quarter, according to the weighted average of 11 economists surveyed by Bloomberg. Wolf says the bank will cut its rate from three percent to 2.75 percent at its next meeting.