OTTAWA (Reuters) - The Bank of Canada kept its key interest rate on hold at 4.5 percent on Tuesday, as expected, and stayed neutral with a very slight easing bias because of the strong Canadian dollar and this summer's credit crunch.

Despite the bank's more dovish tone, economists agreed there were no rate moves expected in the near term. A rate cut looks more likely in 2008, although some analysts still forecast an eventual hike in the overnight lending target.

The bank suggested that liquidity problems in global credit markets had done some of the work of tightening borrowing conditions in Canada. It now assumes the cost of credit to be 25 basis points higher than it was before the market turmoil that began in mid-August.

Another development that could soften inflation is the Canadian dollar's rise last month to parity with the U.S. dollar for the first time in 31 years.

"The bank judges, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term," it said.

However, the central bank added a new nuance to its risk assessment, signaling a rate cut is now an option.

"All factors considered, the bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside."

The bank raised rates in July after pausing for over a year and at that time hinted at more tightening to come.

But after the global credit crunch in August, it suggested it would stay on the sidelines while assessing the impact on growth from the financial turbulence.

"It's the first time the bank is hinting at an easing bias in quite some time and I think the main concern here is the rapid run-up in the Canadian dollar alongside the deepening slump in the U.S. housing market and the ongoing dislocations in the credit markets," said Sal Guatieri, senior economist at BMO Capital Markets.

"If the Canadian dollar stays where it is right now, I think the odds of the Bank of Canada cutting interest rates increase," he said.

The Canadian dollar gained to 97.54 Canadian cents to the U.S. dollar, or US$1.0252, from a pre-announcement level of about 97.99 Canadian cents to the U.S. dollar, or US$1.0205. Bonds were higher but gave back some early gains.

Some market players actually expected the bank to talk down the dollar more aggressively, which could explain the currency's rise following the release, said Eric Lascelles, chief economics and rates strategist at TD Securities.

"They certainly don't talk about cuts, they certainly don't talk about hikes, and I think this 4.50 could become a very familiar number going forward," he said.

The bank now assumes the Canadian dollar will average 98 U.S. cents, a level chosen simply because it is the midpoint of its trading range since the bank's last report in July.

But it is well below the current level and below market expectations for the currency. If it were to persist above the assumed level, the bank said, "Canadian output and inflation would be lower."

The downturn in the U.S. housing sector could drag on growth and inflation while the main opposing risk is that excess demand could persist longer than projected, it said.

That strong demand and an economy running above its production potential prompted the bank to tweak its 2007 economic growth projection to 2.6 percent, from 2.5 percent.

However, it cut its 2008 growth forecast to 2.3 percent from its July forecast of 2.6 percent, as the weaker U.S. outlook and the stronger Canadian dollar depress exports. The bank now sees 2009 growth at 2.5 percent instead of 2.4 percent.

The downward pressure on prices means the bank now expects total inflation and core inflation, which excludes volatile items and guides monetary policy, to drop to its 2 percent target in the second half of 2008, rather than in early 2009.