The Bank of Canada left its key interest rate unchanged on Tuesday, and said there has been little recent movement in its outlook for the economy and inflation.

The overnight rate — the rate that large banks can charge each other for overnight loans — remained at 4.25 per cent, where it has been since May 24 when the central bank bumped up the rate by one-quarter of a percentage point.

In a commentary accompanying its rate decision, the bank said the overall inflation rate and the core inflation rate — which omits several volatile factors, such as energy and food — are expected to converge at two per cent by the middle of next year.

The bank said the main upside risk relates to the momentum in household spending and housing prices, while the main downside risk is that the U.S. economy could slow more sharply than expected, leading to a reduction in Canadian exports.

"The bank judges that, overall, risks around the inflation projection are roughly balanced," it said.

The bank's steadfastness had been widely projected by economists.

No rate change seen at next policy meeting

"The bank's comments point to unchanged policy at the next fixed announcement date on Jan. 16, and likely beyond," said Bank of Montreal senior economist Sal Guatieri. "We continue to expect rates to remain stable through 2007."

Most economists see the central banking cutting rates in the first half of the year. CIBC World Markets, for example, sees a quarter point cut in March and three more cuts later in the year. 

TD Bank economist David Tulk forecasts a quarter of a percentage point cut in April. "It is important to note that this comparatively modest amount easing does not signify the start of a new easing campaign but rather reflects the Bank taking out an insurance policy against the risk of slower growth," he said.

Last week's unemployment report — the last major piece of economic news before Tuesday's interest rate decision — did little to convince economists that the central bank would alter its course in the short term.

The November jobless rate came in at 6.3 per cent, up a 10th of a percentage point from October. The economy added 22,400 new jobs, but the unemployment rate ticked up as more people looked for work.

On Oct. 17, the date of its most recent interest-rate decision, the central bank said it had lowered its 2006 national growth forecast to 2.8 per cent from its earlier forecast of 3.2 per cent. Its 2007 outlook was also cut to 2.5 per cent from 2.9 per cent. The 2008 growth forecast remained unchanged at 2.8 per cent.

The bank's next interest-rate decision is scheduled for Jan. 16, 2007, which is two days prior to the release of its next update on its outlook for the Canadian economy.