The Bank of Canada said Tuesday that it is maintaining its target for the overnight rate at 0.25%, and reiterated its conditional commitment to hold the current policy rate until the end of the second quarter of 2010.

The Bank Rate is unchanged at 0.5% and the deposit rate is 0.25%.

“There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system,” the Bank of Canada stated. “However, the recovery is nascent.”

The announcement to leave interest rates unchanged was in line with expectations, but some economists were surprised at the new degree of optimism expressed by the bank.

The bank said it now expects the economy to contract by 2.3% this year, a slight improvement from the 3% contraction it forecast back in April.

For 2010, growth is now projected to hit 3%, an improvement from April’s outlook of 2.5% growth. The bank did moderate its 2011 outlook to 3.5% from its April forecast of 4.7% growth.

“The central bank is clearly less worried about the downside risks to growth,” commented CIBC World Markets economist Avery Shenfeld. “That degree of optimism, however, may understate the structural challenges to brisk growth abroad, and the risks to Canada from an overvalued exchange rate.”

Shenfeld considers a 3% growth rate for 2010 to be an ambitious projection. “We expect growth to run at roughly half the Bank’s call,” he said.

Economists at TD Bank Financial Group agree. “The Bank’s forecast for 2010 is well ahead of our own (1.4%) and the overall private-sector consensus,” said TD economist Grant Bishop.

The Bank of Canada also expressed concern about the strength of the Canadian dollar. In its statement accompanying the rate decision, the central bank cautioned that the higher Canadian dollar, plus restructuring in some major industrial sectors, “is significantly moderating the pace of overall growth.”

But the bank’s concerns around the loonie appear to have moderated since its last statement, economists noted.

“The comment on the currency actually represented some easing in the Bank’s concern relative to its April’s comment that ‘if the unprecedentedly rapid rise in the Canadian dollar proves persistent, it could fully offset [other] positive factors’ cited at the time,” said RBC Economics Research assistant chief economist Paul Ferley.

A full update of the Bank of Canada’s outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on Thursday, July 23.

The next scheduled date for announcing the overnight rate target is September 10.

IE