The Bank of Canada has cut its economic growth outlook for the country this year, and left a key interest rate unchanged on Tuesday.

The bank left its overnight rate — what big banks charge each other for overnight loans — steady at three per cent. Economists had widely expected the bank's decision to stand pat on borrowing costs.

The Canadian dollar gained strength against the U.S. dollar following the rate announcement. The loonie briefly pushed back above parity with its U.S. counterpart, but ultimately closed at 99.77 cents US, up 0.29 of a cent on currency markets.

In conjunction with the interest rate decision, the bank said it expects economic growth in Canada this year of only one per cent. Growth is expected to rise to 2.3 per cent in 2009 and 3.3 per cent in 2010.

Sliding Growth Outlook

Jan. 2008 April 2008 July 2008
2008 1.8% 1.4% 1.0%
2009 2.8% 2.4% 2.3%
2010 N/A 3.3% 3.3%
Source: Bank of Canada

That is down from the lowered outlook the central bank offered in April, when it said it expected 1.4 per cent growth for this year. In January, the bank said it was looking for 2008 growth of 1.8 per cent.

The bank also sounded a warning over its outlook for inflation, saying that commodity prices continue to outstrip expectations.

"Assuming energy prices follow current futures prices over the projection period, total [Consumer Price Index] inflation is projected to rise temporarily above four per cent, peaking in the first quarter of 2009," the bank said.

The bank sees energy prices subsequently stabilizing and inflation is projected to return to its two per cent target in the second half of 2009.

Many economists see the central bank remaining on the sidelines for several months.

"While the bank has ramped up the inflation forecast, the reality of the global credit crunch and dicey outlook for the U.S. economy will keep them on hold for some time yet," said BMO Capital Markets economist Douglas Porter. "We have been calling for the bank to stay on hold until the spring of 2009, when we see them starting to bump rates higher, and there is nothing here to change that view."

The bank will offer more details on its outlook for the economy and inflation on Thursday, when it releases its update to the monetary policy report.

The central bank surprised many observers last month when it held the line on interest rates. Many economists had been projecting a rate cut of one-quarter of a percentage point.