Bank of Canada holds key lending rate at 4.25%

Updated Wed. Sep. 6 2006 9:17 AM ET

Canadian Press

OTTAWA --

Although struggling Canadian exporters continue to drag on the nation's economy, the central bank said Wednesday that Canada's economic performance is still meeting its expectations.

"The bank continues to expect the Canadian economy to operate at about its production potential, with total CPI (consumer price index) inflation returning to the two per cent inflation target in the second half of 2007," the bank said in a statement.

A high Canadian dollar combined with a slowing U.S. economy cut Canada's exports by billions of dollars in the first two quarters of 2006 but strong commodity prices, particularly for oil and natural gas, have mitigated the impact of weak exports somewhat, the bank said.

The bank said it will also keep a close eye on Canada's booming housing market, which drove inflation higher than expected in the second quarter of 2006. Alberta's housing market continues to fuel the national boom as housing prices there soar, particularly in Calgary, Edmonton and oilsands centre Fort McMurray.

While housing prices continue to cause inflation concerns, the bank says Canada also faces the risk that the U.S. economy will slow more quickly than expected. Should that happen, economists have predicted that Canadian manufacturers will continue to see their exports drop.

The Bank of Canada will release its next monetary policy outlook Oct. 19.