Governor of the Bank of Canada Mark Carney held the bank's benchmark lending rate steady at 0.25 per cent on Tuesday.Governor of the Bank of Canada Mark Carney held the bank's benchmark lending rate steady at 0.25 per cent on Tuesday. (Richard Lam/Canadian Press)

The Bank of Canada kept its benchmark lending rate at 0.25 per cent Tuesday, reiterating its conditional commitment to hold rates steady until the middle of 2010.

Although it held the overnight lending rate steady, the bank did acknowledge that the recovery appears to be proceeding at a better pace than it was anticipating.

"While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected in its October monetary policy report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems," the bank said in announcing the rate decision.

The Canadian economy grew by a tepid 0.1 per cent in the third quarter, Statistics Canada reported last month. But that "is expected to have picked up further in the fourth quarter," the bank said.

The Bank projects that the economy will grow by 2.9 per cent in 2010 and 3.5 per cent in 2011, after contracting by 2.5 per cent in 2009.

In its statement, the bank repeated its mild concern over the risk that the elevated Canadian dollar presents to the recovery.

"The persistent strength of the Canadian dollar … continues to act as a significant drag on economic activity in Canada," the bank said.

The bank is set to release its next decision on interest rates on March 2.

Rates to stay steady

"The bank remains committed to the conditional commitment to keep rates steady and low until mid-year," said BMO Capital Markets deputy chief economist Doug Porter.

"Our view is that the bank then starts gradually lifting rates immediately thereafter, and there's little here to sway that outlook. The recovery continues, but it will remain sub-par and still depends on a lot of stimulus."

The bank also acknowledged that core inflation — excluding more volatile food and energy prices — was "higher than expected in recent months."

In a commentary, ATB Financial economist Dan Sumner said: "The closer we get to the all important third quarter rate announcements there will be more pressure on the BOC to provide guidance on the speed with which interest rates will be brought higher."

With files from The Canadian Press