No one seemed surprised that the Bank of Canada kept its overnight rate unchanged at 2% this morning, but some eyebrows were raised by the bank’s commentary and what it may mean for rates down the road.

The decision to hold the line on rates had been unanimously anticipated by financial-markets, but somewhat more surprising, according to some economists, was the fact the bank made no reference to the fact that the most recent string of economic data has come in much stronger than expectations.

The only notable exception highlighted in the bank’s press release was the increase in crude oil prices, which is likely to push the headline rate of inflation above the bank’s expectations in the months ahead

“In what can only appear as a valiant effort to remain silent, the bank limited itself to stating that ‘economic information received since the release of the April Monetary Policy Report has been generally consistent with the bank’s expectations for growth and core inflation’,” said Marc Lévesque, assistant vice president and senior economist with TD Bank Financial Group.

Overall, Lévesque said, the bank’s projections for growth and core inflation remain unchanged from those underlined in the MPR — that the economy will return to full capacity by the third quarter of 2005, and that core inflation will return to the 2% target by the end of next year.

“In other words, not only did the Bank keep rates unchanged, but it did not provide even as much as a hint as to the likely direction of its policy settings in the months ahead,” he said.

Lévesque takes issue with bank’s position that the economic data released since the MPR has been “generally” consistent with the its outlook.

“While the 2.4 per cent growth rate in real GDP recorded in the first quarter was on the weak side, the underlying picture was anything but, with all of the softness due to slower inventory growth. Not only did final domestic demand power ahead at a 4.8 per cent annualized pace, but more important still, the net export side of the ledger added more than two full percentage points to GDP growth. This clearly raises the odds that the economy is shaking off the hit from the dollar’s gains faster than expected.

“With growth on track to hit 3.5% to 4% in the second quarter, the widening in the output gap that the Bank was expecting in the first half of the year appears unlikely. Nor can we just shrug off the fact that the Canadian economy created a whopping 105,700 jobs in April and May alone.”

That suggests the Canadian economy appears to be holding up remarkably well – perhaps too well to justify a 2% overnight rate for all that much longer.

“Look for the Bank to start raising rates in September, and to engineer a total of 75 basis points in hikes before the end of the year,” Lévesque said.

BMO Nesbitt Burns Inc. chief economist, Sherry Cooper, said after cutting rates just seven weeks ago, the bank “is in the process of gradually – very gradually – turning the other way.”

“We continue to believe that a rate hike at the next decision date (July 20) is a long shot, especially given the neutral language today, but the September 8 meeting is a real possibility – indeed, the consensus is now firmly in that camp. Upcoming spending and inflation data will drive the timing of the first move.

In its release, the central bank gave few hints of what it might do in July and September – its next scheduled rate-setting opportunities. Its U.S. counterpart, the U.S. Federal Reserve, is expected to boost its key policy rate at the end of this month by a quarter point to 1.25% to keep a lid on inflation in its booming economy.

The central bank expects that growth in this economy, which averaged 2.4% in the first quarter of this year, will pick up the pace a bit and eventually start to push up the core rate of inflation. In its brief statement, the central bank noted that economic growth “has been generally consistent” with its expectations for gross domestic product and the core inflation.