The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3%.

The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3.25%.

While interest rates haven’t changed, RBC Capital Markets observes that if there has been a shift in the central bank’s message “it is that the downside risks to economic growth emanating from the United States are increasingly weighing on the 2009 outlook.”

“The Bank’s statement continues to highlight the three major developments affecting the Canadian economy identified in the July Monetary Policy Report: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and the sharp increases in many commodity prices. What was new in today’s statement was the suggestion that the interaction of the first two developments could pose greater downside risks to the U.S. outlook for 2009,” RBC says.

National Bank Financial also notes that the Bank views the uncertain U.S. economic outlook as the main source of concern to Canadian growth for coming quarters. However, it adds that, “At this point, the BoC still perceives the fundamentals underpinning Canadian domestic demand as strong enough to offset much of the weakness from exports as to keep the level of economic activity close to its production capacity.”

Moreover, the inflation outlook has eased. TD Economics suggests that the most significant development since July “has to be that energy and overall commodity prices have retreated significantly.”

“Status quo commodity prices imply headline inflation is unlikely breach the 4% mark, which it surely would have if summer peak-level oil prices had been sustained. Hence the spike in Canadian headline inflation will be lower than anticipated and short-lived,” it says.

“On the inflation front, while recognizing that the recent downturn in commodity prices will help reduce the threat of an unacceptable build-up in inflationary pressures, the BoC still expects core CPI inflation to drift up to 2% over the next few quarters,” NBF explains.

More importantly, NBF suggests, the Bank reiterated that its current stance of monetary policy is “appropriately accommodative” at this point in time. “This will undermine market expectations which, as of yesterday, were calling for 58 basis points of rate cuts through the end of January,” it says.

TD says that in addition to the “appropriately accommodative” stance, the Bank also noted that “financial conditions [in Canada] remain significantly better than those in most other major economies”.

“Overall, we view this as the BoC reaffirming their neutral stance with the likely and intended consequence that market expectations for a rate cut will be pared back to negligible levels,” TD concludes. “It is becoming clear the BoC would have to see either significantly weaker-than-expected labour and/or housing markets or renewed stresses in Canadian financial markets conditions to consider easing further. Short of that, we look for the BoC to stay on hold for the balance of the year.”

“In our opinion, the Bank of Canada did right thing this morning by reminding market participants that its policy stance is already accommodative and that most of the downside risks are external. The BoC has already provided 150 BP of stimulus since last fall. Unless the world economy deteriorates significantly in the coming quarters as to drive the price of energy below the level that would threaten the expansion of western provinces and/or labour markets collapse, the odds remain in favour of keeping the overnight rate at its current level,” NBF concludes. “Our forecast still calls for the BoC to stay put well into 2009.”

“Today’s statement has indicated some greater downside risks to growth emanating from a faltering U.S. economy while acknowledging that the hit to inflation from higher energy prices may not be as pronounced as feared in July. However, the risks to growth are focused more on activity in 2009 with the domestic economy currently remaining strong, while global inflationary pressures continue to present a near-term risk. This characterization of the economy leaves the central bank on the sidelines monitoring the economic data to see whether one or the other risk becomes dominant,” RBC concludes. “Our forecast assumes a 3.00% overnight rate through the end of this year before being gradually raised in 2009 as the downside risks to growth ease.”

The Canadian dollar got a boost after the rate announcement. Down before the news, the loonie later traded up 0.35 of a cent at US93.93¢ on currency markets.

@page_break@The Bank of Canada’s next scheduled date for announcing the overnight rate target is October 21.

A full update of the bank’s outlook for growth and inflation, including risks to the projection, will be set out in the Monetary Policy Report, to be published on October 23.