The Bank of Canada has left its key overnight at 4.5%.

Markets and analysts had widely expected the bank to stand pat on rates.

In its statement today, the bank said that inflation pressures are still running above its target range, but they are mainly in line with its expectations. The overall annual inflation rate in July stood at 2.2%, which is above the bank’s goal of 2%.

Problems in the U.S. housing market will now be longer and more pronounced due to fallout from a credit crunch in financial markets, the bank added.

Bay Street economists are divided over how soon the central bank may resume hiking rates, if at all.

RBC Economics notes that the Bank of Canada acknowledged that economic growth was stronger than expected in the first half of 2007 and that inflation rates remain elevated. However, it also allowed that weakness in the U.S. housing sector could spill over into Canada, and that tight credit conditions could hamper domestic demand. As a result, it left rates unchanged.

“Our assessment is that, on the basis of the economic data, the Bank of Canada would be raising the policy rate to get inflation back down to its 2% medium-term target,” RBC says.

The real uncertainty facing the Bank, and economists trying to predict its next move, is how long and deep the credit troubles turn out to be. “The feed-through of the credit crunch to the real economy is very much a black box and the Bank has wisely chosen to err on the side of caution,” TD Bank says.

“However, should credit conditions settle down over the next couple of months — and we are hopeful that this will indeed be the case — the real economic impact would likely be minimal,” TD concludes. “At this point, the Bank would have its attention redirected back to robust domestic demand conditions and elevated inflation in Canada. This leaves us of the opinion that the next move in rates is still more likely to be up rather than down, but the timing is a matter of debate and an October hike now looks less likely.”

National Bank Financial notes that the central bank recognizes that there is a lot of uncertainty about the extent and duration of this tightening of credit conditions in Canada. “If it was to end up being a short-term event, the Bank could move back to a tightening bias,” it allows.

“However, we believe the situation will not correct itself that quickly,” NBF says. “It is worth noting that back in July, the Bank was projecting the U.S. economy to grow by 3% in 2008 and 2009. Given current conditions, we forecast an anemic 1.6% U.S. growth rate for 2008. We believe that the upcoming October MPR could very well deliver a significant downward revision to the Bank forecast and open the door for a rate cut.”

BMO Nesbitt Burns predicts that the dislocations in credit and money markets will persist through mid-October, “which is when the standstill agreement in the third-party asset-backed commercial paper market expires”.

“With Governor Dodge’s mandate ending January 31 (leaving three more rate announcements), it might be the job of the new governor to resume the Bank’s rate hike campaign,” it says. “However, we must acknowledge that the longer these dislocations persist, the greater the risks to the economy and the greater the odds the Bank’s tightening cycle is over. For the time being, we’ve penciled in a parting rate hike by Mr. Dodge.”

RBC says, “We remain comfortable with our view that the Bank will hold the policy rate at 4.50% until early next year when an easing in the credit crunch and a return to more benign global financial market conditions will temper the downside risks and see the Bank’s focus return to the upside risks to the inflation outlook and a return to interest rate hikes.”

As for the dollar, BMO adds, “The lack of Canadian rate hikes and reduced M&A activity (itself a casualty of the credit crisis) have probably clipped the loonie’s chances of flying to parity this year. We still look for the currency to strengthen on greenback weakness. However, any potential test of parity is now probably a next year story.”

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A full update of the bank’s outlook for growth and inflation, including risks to the projection, will be set out in the Monetary Policy Report, to be published on October 18.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is October 16.