In a widely expected move, the Bank of Canada kept its key overnight interest rate unchanged at 4.5 per cent Wednesday.
explained that the cautious move was the result of uncertainty over where the economy and inflation are heading.
Bank of Canada governor David Dodge increased the key interest rate to 4.5 per cent in July -- from 4.25 per cent -- in a bid to keep inflation under control and to cool a hot economy.
At the time, most analysts were predicting that another rate hike was likely in September.
However, after a month of turmoil in financial markets -- fuelled by a credit crunch in the U.S. subprime mortgage market -- the Bank of Canada decided to stand on the sidelines Wednesday.
"Near-term prospects for economic growth outside North America appear to be slightly stronger than anticipated... while near-term economic prospects for the United States are weaker than expected," the central bank said Wednesday in a press release.
"It now seems likely that the adjustment in the U.S. residential housing sector will be more pronounced and protracted, exacerbated by recent developments in financial markets."
The bank said it was uncertain about how the turmoil will impact the overall Canadian economy -- which appears to be in overdrive now.
"On balance, this implies weaker demand for Canadian exports than had been expected at the time of the July MPRU (Monetary Policy Report Update).
"Recent developments in financial markets have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand."
Sal Guatieri, economist with BMO Nesbitt Burns, said the bank is simply unable to accurately predict what's going to happen next.
"If August had been just a dream rather than a real-life nightmare in credit markets, the bank would surely be raising rates today to address stronger-than-expected economic growth and bubbling inflation pressures," writes Guatieri.
"But the economic outlook is simply too uncertain, and the risks of a U.S. recession uncomfortably high, to entertain thoughts of tightening."
The bank also issued a mixed outlook on the risks to inflation -- currently running above the bank's two per cent target.
"On the upside, there is a possibility that household demand in Canada could be stronger than anticipated, while on the downside the ongoing adjustment in the U.S. housing sector could be more severe and spill over to the U.S. economy more broadly," said the bank.
The Bank of Canada's next scheduled date to announce the overnight rate target is October 16.
