Canada holds, says policy appropriately loose

The central bank said the benchmark overnight rate was "appropriately accommodative". In the statement following the last rate-setting meeting in July, the institution described the rate as "appropriate".

Since July, an increased risk of "a more pronounced interplay between weakness in the US economy and tightness in credit conditions" had emerged, which had the potential to hamper US growth and, consequently, Canadian economic expansion next year.

The central bank's prediction in July of weaker-than-assumed commodity prices had materialised, reducing the upside risks to inflation. However, the central bank said that commodity prices were likely to remain volatile due to tight inventories and that inflationary pressures were still "elevated". And, though the level of economic activity was now slightly slower than expected in July, the Canadian economy was still operating close to its production capacity.

But the central bank now expects headline inflation, which stands at 3%, to be lower between now and the first quarter of 2009 to fall more steeply than earlier predicted based on the recent fall in spot and future prices for energy.

Both headline inflation and the core CPI measure, now 1.5%, were expected to converge on 2% in the second half of next year.

The central bank's next rate-setting meeting is scheduled for 21 October.

Click here to read the central bank's statement