The Bank of Canada held its key interest rate at 4.25 per cent on Tuesday, saying the economy is acting in line with the expectations outlined in its last monetary policy outlook.

"The Canadian and global economies are evolving broadly in line with the bank's expectations,'' the central bank said in announcing the rates will be held for the sixth straight session.

Real gross domestic product in Canada increased in the fourth quarter of 2006 at a rate consistent with the Bank's projection, while both total consumer price index (CPI) and core inflation have been largely as expected, the Bank of Canada said.

Inflation is running just about on target, unemployment is flirting with 30-year-lows and economic growth picked up in December after two slow months.

"The Canadian economy is expected to continue to operate near its production capacity through 2007 and 2008,'' the bank added.

"Total CPI inflation should average just above one per cent in the first half of 2007, returning to the two per cent target in 2008. Core inflation should remain near two per cent throughout this period.''

The central bank said that despite recent volatility in global financial markets, it judges the risks to its inflation predictions are roughly balanced.

"The main downside risk continues to be that growth in the U.S. economy could be lower than expected," the bank said in its statement.

"The main upside risk continues to be that household spending in Canada could be stronger than expected, largely because of borrowing against increased home equity," the bank said.

The bank last changed the interest rate in May, when it bumped it up a quarter of a percentage point.

The Bank of Canada's next scheduled rate-setting date is April 24. The bank will issue its next monetary policy report two days later, on April 26.

Most economists have said they don't expect any rate changes in the coming months.

"The data results are largely tracking the Bank of Canada's forecasts and we believe that gives central bankers little reason to change their current policy outlook," said Dawn Desjardins, senior economist at the Royal Bank of Canada, in a note.

Desjardins said she forecasts the central bank to hold the policy rate steady this year, but predicts that there will be rate hikes in the second half of 2008.

The Canadian dollar saw a boost after the report, trading at 85.15 cents (U.S.) from yesterday's close of 84.70 cents.

With files from The Canadian Press