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Bank of Canada governor Mark Carney kept the bank's overnight lending rate unchanged at one per cent on Tuesday. (Chris Wattie/Reuters)

The Bank of Canada kept its benchmark lending rate unchanged at one per cent in its latest policy decision on Tuesday.

Since raising its overnight lending rate to one per cent in September, the bank has held steady for four consecutive policy decisions.

But while the bank kept the rate steady, its statement took a cautious tone with regards to future rate hikes.

"Any further reduction in monetary policy stimulus would need to be carefully considered," the bank said.

'There are no indications here that rate hikes are close.' —Michael Gregory, BMO economist

In recent months, Bank of Canada governor Mark Carney has repeatedly warned Canadians to get their financial houses in order, noting that interest rates will rise at some point.

"For those hoping for discernable hints of hawkishness in the Bank of Canada’s policy statement, those hopes were dashed today," Bank of Montreal senior economist Michael Gregory said in a commentary after the central bank's decision was released.

"While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes," the central bank's statement read.

No hikes on the horizon

Last week, the C.D. Howe Institute panel on monetary policy recommended that the bank start raising the rate to ward off future inflationary pressures.

But unfolding conflict in the Arab world and uncertainty about Canada's economic recovery in the interconnected global economy appear to be tying the bank's hands for now.

The persistent strength in the Canadian dollar and Canada’s poor relative productivity performance remain a concern, the bank said.

On Monday, Statistics Canada released data that suggested the economy is performing more than slightly better than the bank's January assumptions. Growth in the last three months of 2010 was a full percentage point bigger than the bank's forecast, at 3.3 per cent, and many economists now believe 2010 will also show considerably stronger growth than the bank's estimate of 2.4 per cent.

It is not unusual for the Bank of Canada to signal only moderate changes to its outlook between forecast periods. However, it may be that Carney is not yet a believer that the better economic performance of the past few months will hold up.

Loonie lower

Not all economists believe the strong ending to 2010 will necessarily carry enough momentum to be sustained in 2011.

Some, including TD Bank, think the quick start will give way to a slowdown as the year proceeds, much like what happened last year when the economy exploded off the blocks only to slow to a crawl by the third quarter.

"There are no indications here that rate hikes are close," Gregory noted, saying the central bank likely wants to see an improving U.S. economy before assuming Canadian exports will be strong enough to deal with the persistently strong loonie that higher rates would create. "We’ve pencilled in a July resumption of rate hikes.

"Carney & Co. appear in no hurry to act, while keeping their policy cards close to their chest," Gregory said.

The Canadian dollar was slightly lower Monday as investors had anticipated the bank's latest move. The loonie was 0.16 of a cent US higher to 103.1 cents before the news, and fell to 102.8 in the moments following.

The bank's next policy decision is due April 13.

With files from the Canadian Press