[ForexNews]

The Bank of Canada left its target for the overnight rate at 0.25% today, and -- crucially -- maintained its conditional commitment to leave the overnight rate untouched through to mid-2010.

The risks to the macro outlook continue to be "balanced", with a slight tilt to the downside for the inflation risks.

Clearly, the Bank of Canada has no near-term aspiration to hike rates.

The report nonetheless came across as slightly more hawkish than past iterations, due to the acknowledgement of an improving global outlook and diminished reference to Canadian dollar woes.

The Bank of Canada's latest rate decision followed a familiar script. The overnight rate itself was unsurprisingly left unchanged for a fifth consecutive time, at the rock-bottom rate of 0.25%. The all-important conditional commitment to leave the overnight rate unchanged through to mid-2010 remained intact, providing the most important signal of the statement. The Bank of Canada has no aspiration to raise rates any time soon, despite a handful of remarkably strong economic indicators in recent weeks.

Confirming this interpretation, the Bank again stated that the risks to the macroeconomic outlook are roughly balanced, and -- despite speculation to the contrary -- maintained its nod that "the overall risks to its inflation projection are tilted slightly to the downside", due primarily to the mechanics of a central bank rate that can go no lower. Without a formal tilt to the risk assessment, it is difficult to imagine the Bank of Canada violating its plan to sit on its hands until at least the latter half of 2010. Note as well that the risk assessment takes on a heightened importance at every second Bank of Canada decision, including this one. This is because the Bank only updates its economic forecast four times a year, yet makes eight decisions. As a consequence, the only signal available to central bank watchers in the intervening meetings, such as this one, is whether the Bank believes the risks have tilted significantly relative to its most recent forecast. The answer appears to be "no".

Nonetheless, the statement does come across at least slightly more hawkishly than past iterations. Most obviously, the Bank stated that "global economic developments have been slightly more positive and the global outlook has improved modestly relative to the Bank's projection in its October Monetary Policy Report."

Less obvious but still relevant, the Bank of Canada very notably reduced its emphasis on the strength of the Canadian dollar. Not surprisingly (given the relative docile nature of the Canadian dollar recently), the line in the prior report about the strength in the Canadian dollar more than offsetting economic improvements was scratched. By the same token, the discussion about the economic drag provided by the currency was also removed, primarily because the Bank of Canada's current forecast already embodies that assumption.

Another subtle shift towards strength was that the factors affecting the balance of risks were directly discussed in this report. This decision was no doubt related at least in part to the simple availability of additional space in this statement versus the prior one (which had to cram in a formally updated economic forecast). Even though the risks are the same as the ones cited in the most recent Monetary Policy Report, the list is found somewhat telling. The stated upside risks are global and domestic demand. Both upside risks have manifested themselves recently, with recent global strength explicitly acknowledged earlier in the statement, and strength in domestic demand visible for all to see, with a whopping 4.7% annualized gain in Q3 domestic demand and recent housing indicators showing remarkable growth. On the flip side, the downside risks are a more protracted global recovery (which has not transpired) and the strength of the Canadian dollar (which is now softer than the Bank had assumed in its last forecast).

Overall, then, this report should dampen expectations for near term rate hikes as the Bank of Canada's plan going forward seems to be absolutely unchanged. However, a close reading of the report does reveal some additional subtle strength and hawkish rhetoric that was not evident in earlier reports. For now, we remain comfortable with the opinion that the Bank of Canada will not begin removing traditional monetary stimulus until the fourth quarter of 2010. But if the upside risks continue to outpace the downside risk, it is far from inconceivable that the Bank's official assessment of the balance of risks could begin to tilt upwards, bringing with it the possibility of sooner hiking.