The Bank of Canada announced Tuesday that it is maintaining its target for the overnight rate at 3.25%. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3.5%.

The bank said data released since the its last interest rate announcement indicate that both core and total CPI inflation declined in April more than expected. It added that the Canadian economy continued to expand in the first quarter of 2003, reflecting firmness in domestic demand.

The central bank commented that it expects some near-term weakness in the Canadian economy. The caution reflects concern over SARS and the possibility of cutting rates in the next quarter.

The bank said it now appears that both core and total CPI inflation will return to the 2% target somewhat earlier than it expected in April.

Economists weren’t expecting the Bank to move rates today, but in parsing the Bank’s accompanying statement economists are divided over whether the hikes to continue in the fall, or not until 2004.

Bank of Montreal notes that the Bank’s press statement cited three reasons for curtailing the rate tightening cycle. “First, owing in part to a sharp decline in April, the Bank now expects both core and total CPI inflation to return to the 2% target ‘somewhat earlier’ than expected. Second, the economy will likely remain soft in the near term because of weakness in the U.S. and global economies and the impact of SARS. Third, the ‘significant’ appreciation of the Canadian dollar will dampen economic growth.”

“It appears increasingly likely that the Bank will stay on the sidelines through the remainder of this year,” says BMO Nesbitt Burns. “The Q2 soft patch for Canada is looking softer all the time — indeed, an outright decline in second-quarter GDP cannot be ruled out. And, the sudden drop of CPI gives the Bank the luxury of time to wait for growth to recover. Still, the next move by the Bank is likely to be a rate hike, although probably not until the U.S. economy has decisively turned – i.e. by early 2004.”

TD Bank also predicts that last April’s rate hike was the last for this year. “For one, it does indeed look as if the core rate of inflation will be hovering close to the Bank’s 2% target for the remainder of 2003, even after factoring in a reversal of April’s drop in energy prices in May.”

RBC Financial observes, “The fact that the Bank fails to mention that the economy will be operating close to capacity in 2004 suggests that, while growth will improve, it will not be strong enough to generate upward pressure on inflation next year.” RBC says that today’s announcement suggests that the Bank of Canada will keep rates steady in the near-term.

“Only an upward bounce in Canadian growth to roughly 3.5% or higher in the second half of this year and the first half of 2004 — a possibility that we believe is more likely than not to occur – would result in further rate increases,” concludes RBC.

The next scheduled date for announcing the overnight rate target is July15.