Source: The Canadian Press

The Bank of Canada signalled Tuesday it is likely to keep interest rates at current low levels for several more months, saying there are still plenty of risks to the economic recovery even though conditions.

The decision to keep the policy rate unchanged at 1% until at least March was widely expected, but not the central bank’s super-cautious tone.

“The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand,” it said in a statement.

Economists had expected more enthusiastic language in light of massive new stimulus in the U.S. last fall, and stronger employment and other indicators in Canada over the past few months.

The bank did brighten its growth projections for the Canadian economy to 2.4% this year and 2.8% next — from the previously forecast 2.3 and 2.6% respectively — but not as much economists had expected.

“It’s a little more dovish than we would have expected… Frankly, their forecast revision from October is modest to say the least,” said economist Douglas Porter of BMO Capital Markets.

The dollar fell about a quarter of a cent after the release, dropping below the $1.01 level it had held for several days. By closing it had lost more ground, falling 0.58 cents in total to 100.72 US.

Ironically, after the bank announcement, the Conference Board of Canada put out an even gloomier forecast of a flat 2% advance this year.

Both are below the consensus call of a 2.5% advance in 2011, and well south of some who see the economy moving forward at a greater than three-per-cent clip.

Analysts said it was possible Bank of Canada governor Mark Carney wanted to avoid any hint he may be contemplating raising interest rates in the upcoming months, fearing that would cause the Canadian dollar to rise further.

In the accompanying statement Tuesday, the bank’s governing council stressed that the high dollar, along with poor productivity, is holding back a recovery in the export sector, resulting in the current account deficit hitting a 20-year high.

“The Bank of Canada appears to have gone to lengths not to sound hawkish — to avoid igniting another surge in a Canadian dollar already above parity with the U.S. currency,” said TD Bank economist Pascal Gauthier.

Carney, who will issue a more fulsome outlook on conditions Wednesday, masked his intentions on future rate hikes well.

Analysts were all over the map on when to expect an increase to the policy rate, ranging from as early as April to as late as next year.

There is little pressure on Carney to move early, other than he has expressed concerns about the current level of borrowing costs. He titled his last speech in December, “Living with Low for Long.”

The bank noted that inflation remains well under control, and the recovery, while slightly better than anticipated, is still beset with fragilities and risks, particularly possible fallout from the European debt problems.

On Monday, the federal government gave the Bank of Canada more leeway by tightening borrowing conditions in the housing market, easing concerns that super-low rates could trigger a housing bubble.

The Bank of Canada has warned for months that the debt loads of consumers are increasing at an alarming rate — which could cause problems when rates do rise and the affordability of credit drops.

Unusually, the bank did not even mention Canada’s housing market in its statement.

But the over-riding concern, said Darcy Briggs, portfolio manager with Bissett Investment, is that Carney does not want to get too far ahead of the U.S. Federal Reserve, which still has its key rate at zero and pumping money into the economy.

“The Canadian economy is inter-connected with the U.S. and so it’s pretty hard for the bank to completely decouple from monetary policy in the U.S.,” Briggs said.

“If the bank were to hike while the Fed is still engaged in quantitative easing, it would put additional pressure on the dollar, and additional pressure on exports and thus growth.”