Bay Street economists were not at all surprised that the Bank of Canada’s maintained its overnight lending rate at 2.5% today.

“It appears that the Bank seems generally comfortable with where interest rates currently are,” said Carl Gomez, economist at the TD Bank Financial Group., “and, in our base case view, this also suggests to us that the Bank will remain on the sidelines until at least the summer.”

Said BMO Nesbitt Burns chief economist, Sherry Cooper: “The Bank looks to be on hold for some time yet, having completed the shift to neutral. They no longer seem uncomfortable with rates at such low levels.”

“Nevertheless, the combination of an economy operating close to potential, a calmer Canadian dollar, steady Fed rate hikes, and a modest upward drift in core inflation will likely prompt the Bank to begin nudging rates higher again later this year. We also look for U.S. short-term rates to soon move above Canadian rates, and stay there for the medium term (i.e. a few years).”

In its statement, the Bank said the Canadian economy was still adjusting to “major global developments,” and that the nation’s economic growth for the fourth quarter of 2004 was “marginally weaker than expected” due in part to a “more pronounced” adjustment to the past appreciation of the dollar.

Meanwhile the Bank also projected that the economy will “operate a little further below its full production capacity in 2005 than was anticipated” in the October Monetary Policy Report.

“This is about as clear a form of recognition of the impact that the Canadian dollar is having upon overall supply and demand pressures as things get for a central bank,” noted Dennis Holt, assistant chief economist for RBC Financial Group.

Holt appeared to agree with both Gomez and Cooper that the Bank would “hold the line on rates” until it gradually lifted them in the second half of 2005.

“Simply put, the Bank of Canada can afford to spend some time mulling over the date and assessing the balance of risks and opportunities,” Holt said.

The Bank of Canada dropped its reference to “a considerable amount of monetary stimulus remain[ing] in the economy,” a phrase which had appeared consistently in previous statements. This was the second consecutive meeting in which the Bank had made no change to the rate.

“The ultimate direction of monetary policy will remain as contingent on emerging data as ever,” Gomez said. “In fact, given the speed and magnitude of the loonie’s rise thus far, it is remarkable just how well the Canadian economy has weathered that appreciation.”

“There are certainly enough positives in the domestic outlook to offset some of the negatives in the external side of the economy from a higher currency.”

The Bank of Canada’s Monetary Policy Report Update will be released Thursday and will provide details of the Bank’s outlook for economic growth and inflation through 2006 and will consider the related issues for monetary policy.

The bank’s next scheduled date for announcing the overnight rate target is March 1.