The Bank of Canada did not cut interest rates Tuesday, a surprising move that defied the expectations of most economists.
Analysts had predicted that the overnight rate, which will remain at 3 per cent, would be cut by 25 basis points to 2.75 per cent.
In one survey, 12 out of 12 economists agreed that Bank of Canada governor Mark Carney would make the cut.
The central bank has been very aggressive about cutting interest rates in the past six months to protect Canada from the slowdown in the United States.
"Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected," the central bank said in a statement Tuesday.
"At the same time, many of the downside risks to inflation identified in the April MPR (Monetary Policy Report) have eased, while the evolution of credit conditions has been in line with expectations."
The bank continues to project that economic growth will pick up this year and accelerate in 2009.
The bank says if current energy prices are maintained, total CPI inflation will pass 3 per cent later this year.
"What they're worried about here is that the high price of oil could suddenly push inflationary pressures in Canada's economy pass the comfort zone," BNN's Michael Kane reported Tuesday. "The big thing with monetary policy is that you don't want things to happen too abruptly."
Still, the bank said, with the Canadian economy operating in excess supply, core inflation (which excludes volatile energy and food prices) is expected to remain below 2 per cent through 2009.
"Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance," said the statement.
Against that backdrop, the bank said the current stance of monetary policy is "appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target."
The bank said it will continue to monitor the downside and upside risks to inflation.
The Canadian dollar, which has been on a steady decline this month, jumped modestly to 98.03 cents after the statement from the central bank was released.
The bank's next scheduled date for announcing the overnight rate target is July 15, 2008.
