OTTAWA - The Bank of Canada is keeping its rates at historic lows, warning that while there are signs the economy is on the upswing, "significant fragilities remain."
Those fragilities manifested themselves in an economy that grew less than analysts expected in the third quarter of the year, and inflation that has been slightly higher than the central bank expected.
For those reasons, the Bank of Canada said Tuesday its key overnight rate will remain unchanged at 0.25 per cent, effectively the lowest possible.
"While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly relative to the bank's projection in its October monetary policy report," the bank said in a release Tuesday morning.
The Bank of Canada made an unusual commitment early this year to keep its key rates unchanged until the middle of 2010, but economists have speculated that might change if the economy grew too quickly and inflation threatened to get out of hand.
On Tuesday, the central bank repeated its pledge to keep rates at this level until the end of the second quarter 2010 and renewed its warning about the risks for inflation.
"The risks to the outlook for inflation continue to be those outlined in the October (monetary policy report)," the bank said.
"On the upside, the main risks are stronger-than-projected global and domestic demand.
"On the downside, the main risks are a more protracted global recovery and persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation."
The bank says it expects the economy to take a firmer foothold by the second half of 2011.
In October, the last time it pronounced on interest rates, the bank warned that a soaring loonie was undermining Canada's economic recovery to such an extent that it was more than offsetting the more favourable developments seen over the summer.
The country's top central banker repeated that warning in New York last month.
"Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures," Bank of Canada governor Mark Carney said.
"The current strength of our dollar is expected, over time, to more than fully offset the favourable developments since July."
The strong dollar helps to keep inflation in check, since it reduces the number of dollars required to buy imported goods and services, but it also erodes international demand for Canada's exports.
