OTTAWA - The Bank of Canada held its key interest rate steady and signalled it may keep rates on hold for longer than markets had expected even though it nudged its economic growth forecasts higher.

The central bank held its overnight lending target at 1 percent for the third straight time after raising rates three times between June and September 2010.

"Any further reduction in monetary policy stimulus would need to be carefully considered," it said in a statement that repeated the language used in its two previous rate decisions.

Analysts had expected a slightly more hawkish statement to reflect the stimulative effect on Canada of recently announced U.S. tax cuts.

Although the bank did upgrade its economic outlook slightly, it didn't change its medium-term forecast for a balanced economy by the end of 2012.

It said the high-flying Canadian dollar was hampering recovery in the export sector, the backbone of the Canadian economy, and Europe's debt woes remain a black cloud over the global economy.

Many analysts think the bank is unlikely to push Canadian rates much above their U.S. equivalents because this could send the Canadian dollar to fresh multiyear highs. And Monday's government decision to curb high household debt by tightening mortgage rules for a second time in less than a year could also let the bank delay a fresh rate hike further.

Those looking for hints about the timing of the next rate hike were disappointed.

"It's a very, very cautious outlook," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets. "At least for now they don't see any real benefit in laying cards on the table in terms of expected rate increases."

Forecasters in a Reuters poll last week unanimously predicted no change in rates, but a majority saw at least one rate hike by the end of May this year and three expected a tightening on March 1.

The Canadian dollar softened to C$0.99 against the U.S. dollar from C$0.9867 just before the announcement.

Money market rates and bond yields were lower after the rate announcement. The yield on the rate sensitive two-year Canadian government bond was 1.755 percent, down from 1.792 percent just before the statement.

Tougher Language on Currency

The central bank sees the Canadian economy growing by 2.4 percent in 2011 and by 2.8 percent in 2012. Last October it put likely 2011 growth at 2.3 percent and 2012 growth at 2.6 percent.

It expects business investment to continue to rebound sharply, helping offset the impact of softer consumer spending and a cooling housing market. Net exports will also contribute more to growth in coming quarters despite the strong Canadian dollar, thanks to signs of fresh vigor in the U.S. economy.

But at the same time it toughened its language on the harmful effects of the strong Canadian dollar on the recovery, as some market players had anticipated.

"The cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high," it said.

The Canadian dollar appreciated 5.7 percent against the U.S. dollar last year and nearly 16 percent in 2009.

Courtesy of Reuters