OTTAWA (Reuters) - The Bank of Canada held its key overnight interest rate unchanged at 4.25 percent for the second consecutive time on Wednesday, as expected, saying economic growth had slowed more than anticipated.
Weaker exports dragged down growth in the second quarter to 2.0 percent versus the bank's outlook of 3.2 percent. Core and total inflation in July came in higher than the Bank expected due to higher prices for housing and services.
"Looking forward, the bank continues to expect the Canadian economy to operate at about its production potential, with total CPI (consumer price index) inflation returning to the 2 percent inflation target in the second half of 2007," it stated.
In July's rate announcement, it said the economy was running at "just above" capacity and would return to capacity by end-2008.
"In line with this outlook, the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term," the bank said in a statement on Wednesday.
The central bank raised rates seven times between September 2005 and May 2006.
The Canadian dollar held steady immediately after the decision while bond prices extended losses.
Primary securities dealers polled by Reuters had unanimously forecast no rate move by the bank and 11 of the 13 participants in the survey expect no rate changes by the end of this year. Two expected a rate increase by year-end to 4.50 percent.
The global economy continues its solid expansion despite a moderation in the U.S. economy, the bank said, noting that the rest of the world has strengthened further and commodity prices have remained strong.
The bank flagged slowing U.S. household demand as a key downside risk to the Canadian economy, possibly hurting Canadian exports. Strong Canadian demand and housing prices posed the main upside risks.
It said both risks were slightly greater than in July but "the bank continues to judge that, overall, risks are roughly balanced." It dropped July's reference to there being a small tilt to the downside later in the projection period related to global imbalances.
