Bank of Canada holds rates, downbeat on growth

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OTTAWA, Sept 3 (Reuters) - The Bank of Canada held its key interest rate steady on Wednesday, and while it gave no indication of future interest rate moves, it was more downbeat on the prospects for U.S. and Canadian economic growth.

"The bank judges that the current level of the target for the overnight rate remains appropriately accommodative," it said in a statement outlining its decision to keep the overnight rate at 3 percent.

The move was widely expected. All but one of Canada's primary securities dealers had forecast the bank would hold rates steady.

Also as expected, the bank was slightly more dovish in its tone, possibly leaving the door open to resume a rate-cutting cycle later this year after staying on the sidelines since April. It highlighted a concern that the U.S. economy could perform worse than the 1.5 percent growth it had projected for next year.

"There is an increased risk of a more pronounced interplay between weakness in the U.S. economy and tightness in credit conditions that could affect the U.S. outlook for 2009," it said.

Canada's economy has fared worse than the U.S. economy so far this year but typically feels the fallout from any economic trouble south of the border.

Domestic growth in July was below its expectations but that it remained near the economy's production potential. The bank had projected third-quarter growth in Canada of 1.3 percent.

On the other hand, it said the U.S. economy and global financial markets have so far evolved roughly in line with expectations.

The recent decline in commodity prices, triggered by a slowdown in global growth, has been a major factor driving the Canadian dollar lower versus the U.S. currency.

The global weakness and the weaker currency will have "opposing effects" on Canadian growth.

Growth in July is slightly lower than expected but is still near production potential, and domestic demand remains strong, the bank said.

It repeated its view that total and core inflation would converge at the 2 percent target in the second half of 2009 and that the temporary spike in total inflation between now and early 2009 would be lower than projected. (Reporting by Louise Egan; Editing by Frank McGurty)