The Bank of Canada held its key interest rate on Tuesday at 0.25 percent, as expected, and maintained its outlook on the economic recovery despite unexpectedly weak third-quarter growth.

The main drivers and the profile of the projected recovery in Canada remain consistent with the bank's views in the October Monetary Policy Report, the central bank said in a statement, repeating its conditional commitment to keep rates near zero until the end of June 2010.

The rate decision was widely expected by primary securities dealers surveyed by Reuters and the tone of the statement was broadly in line with market expectations.

The bank once again flagged the strong Canadian dollar CAD= as a major risk to its view, saying it could act as a significant further drag on growth and put additional downward pressure on inflation.

It dropped a reference it made in October that the currency could more than fully offset favorable economic developments since July. This was an apparent acknowledgment that the currency has already taken a toll on third-quarter annualized growth, which was well below the bank's 2 percent projection at a tepid 0.4 percent.

The currency, which had hit a 2009 high on Oct. 15, weakened after the Bank of Canada's remarks in October but began strengthening again in November and now stands at roughly the same level as six weeks ago.

The bank expects the economic expansion to pick up speed and become more widespread across the private sector in the fourth quarter and into 2010 and 2011, becoming less reliant on official stimulus policies.

Inflation will return to the 2 percent target in the second half of 2011, it said. In October, the bank was more precise in saying inflation would hit the target in the third quarter of that year.

Core inflation, which strips out volatile items and is therefore used by the bank to judge underlying price pressures, has been slightly higher than expected, the bank said. But overall inflation has been in line with its predictions.

The major risks to this outlook are the possibility of a more protracted global recovery and stronger-than-projected global and domestic demand on the upside, and persistent strength in the Canadian dollar on the downside. (Reporting by Louise Egan; Editing by Randall Palmer and James Dalgleish)

Canada Inflation