OTTAWA (Reuters) - The Bank of Canada held its key overnight interest rate at 4.25 percent on Tuesday, and signaled it could hold rates here for a while as the risk of inflation roughly matches the risk of a downturn.

"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 central bank said in a statement. It was the third-consecutive time that the Bank of Canada had left its leading interest rates unchanged.

Dealers surveyed by Reuters had unanimously expected no rate move this time or in December, the next rate-setting announcement. The bank hiked rates seven straight times in the months to May.

But economists had been keen to see whether the bank would shift its neutral bias and signal that risks were tilted to the downside. This was not the case.

"It is the bank's judgment that, overall, risks around the inflation projection are roughly balanced," the central bank said.

The bank said the Canadian economy continued to operate at slightly above capacity, but it expected excess demand in the economy to disappear by the second half of 2007.

Citing the softer U.S. economy and lower-than-expected productivity growth in Canada, the bank revised its economic growth forecast for 2006 down to 2.8 percent from 3.2 percent, and its 2007 growth forecast to 2.5 percent from 2.9 percent.

Lower energy prices, combined with the temporary impact of a cut in the federal sales tax, will cause total inflation to average 1.5 percent through to the second quarter of 2007, before returning to the 2 percent target, the bank said.

Previously, the bank said inflation would be slightly above 1.5 percent in the period through to mid-2007.

The Bank of Canada's measure of core inflation, which excludes volatile items and the effects of tax changes, is expected to rise slightly above 2 percent in the coming months and return to 2 percent by mid-2007.