OTTAWA (Reuters) - The Bank of Canada held its key overnight interest rate unchanged at 4.25 percent on Tuesday for the fourth straight time and gave no hint of future cuts despite signs of economic weakness.

The central bank said Canadian inflation, which, at 0.9 percent in the year to October was well below its target, had evolved in line with its expectations. The core rate used for guiding monetary policy was 2.3 percent.

In a statement that offered markets little to chew on and was worded similarly to its October 17 rate announcement, the bank said it still expects both measures of inflation to converge at 2 percent in the second half of 2007.

"They really haven't changed their medium-term forecasts," said Ted Carmichael, chief economist at J.P. Morgan. "They might internally be leaning one way or another but I think they're being very careful here to not show their hand."

The bank targets inflation at the midpoint of a 1 percent to 3 percent range.

The Canadian dollar dipped on the news, falling to 1.1415 per U.S. dollar, or 87.61 U.S. cents in mid-morning trade, compared with C$1.1386, or 87.83 U.S. cents, prior to the bank's announcement. Bonds edged lower.

The market had widely expected no change in interest rates this month, and none of the dealers surveyed in a Reuters poll expect the bank to change rates in January either.

Further ahead, only two out of 14 dealers expect the bank to begin easing rates in March.

The central bank has held rates steady since May after seven straight rate hikes. Canadian rates are one percentage point below the comparable U.S. federal funds rate of 5.25 percent.

The only dovish note by the bank was a suggestion that Canadian and U.S. growth may be slower than expected in the fourth quarter, bringing the bank more in line with private sector forecasts. But the bank said global growth has been strong, commodity prices are still high, and jobs growth in Canada and the United States has been sustained.

In its October Monetary Policy Report, the bank projected Canada's economy would grow 2.6 percent year-on-year in 2006.

"The more important thing is they say their overall forecast for 2007-2008 is unchanged, so that would suggest that if they think growth might be a bit weaker in the fourth quarter, they think we'll make up for that at some later point," said Carmichael.

Carmichael held a contrary view to many analysts, believing the bank will raise rates in mid-2007 amid expectations upside pressures from housing prices and household demand will overshadow a mild U.S. slowdown.

Others, like Sal Guatieri, senior economist at BMO Financial Group, expect no rate changes at all through 2007.

The central bank reiterated that a sharper-than-expected U.S. slowdown remained the key downside risk to the outlook as that would hurt exports. The main upside risks were the momentum in household spending and housing prices.

"The bank is telling the market that it thinks it can stay on hold for the foreseeable future unless things really start to shift negatively in the States and I think the comfort zone for the bank now really goes through the month of December," said Andrew Pyle, senior economist at Scotia Capital.

The bank has previously said the economy is operating slightly above capacity, but it dropped that line on Tuesday. In October, it said it expected the slight excess demand in the economy to disappear by late-2007.