By John Ward
OTTAWA (CP) - The Bank of Canada left its key overnight interest rate unchanged at 4.25 per cent Tuesday and said the economy is developing as predicted.
The stand-pat decision was widely expected, but it may have helped prod investors as the Toronto stock market was up 100 points after the announcement. The central bank last changed the trend-setting rate in May, when it nudged it up a quarter-point. The bank said it's satisfied that the economy is in line with the expectations it outlined in its monetary policy update in January..
"The Canadian economy is expected to continue to operate near its production capacity through 2007 and 2008," the bank said in its announcement.
"Total CPI inflation should average just above one per cent in the first half of 2007, returning to the two per cent target in 2008. Core inflation should remain near two per cent throughout this period."
The bank said risks to its inflation projections are evenly balanced.
The next scheduled rate-setting date is April 24, with the bank issuing its next monetary policy report two days later.
Analysts had mixed outlooks after the announcement, with some expecting a rate cut later this year and others looking for an increase in 2008.
"We expect the Bank of Canada to hold the policy rate steady in 2007, but rate hikes are likely in second half of 2008," said Dawn Desjardins, senior economist at Royal Bank.
"Our forecast that the economy will grow at or slightly above its potential pace in 2007 and 2008 sets up for the bank to swing into rate-hike mode in the second half of next year. We are forecasting that, after holding the overnight rate at 4.25 per cent in 2007, the bank will raise it to five per cent by the end of 2008."
David Tulk, an economist with TD Bank, agreed that an expectation of domestic strength will keep the central bank on hold for the rest of 2007, but said a cut could come if weaker economic growth is accompanied by a slower pace of job creation.
Carolyn Kwan of Scotia Capital said the bank may be happy with the state of things now, but will be watching developments closely.
"The issue going forward is really whether the outlook as they have laid it out is going to be sustained through this year," she said. "We have a slightly different viewpoint. We don't think that the momentum is going to hold up, especially from the U.S. consumer."
As well, she said, there are signs of weakening in U.S. business investment, which some had expected to offset weaker consumer spending.
"I think our outlook diverges even more, relative to some of our peers on the Street. We are calling for a bit of a weaker outlook for the summer and expecting the central banks both in Canada and the U.S. actually to be cutting rates in September."

Copyright 2007 Canadian Press