Canada's central bank keeps key interest rate unchanged

TORONTO (AP) - Canada's central bank has kept its key interest rate unchanged.

Some analysts thought the Bank of Canada might cut the rate as the economy continues to be dragged down by the plunge in oil prices. But the Canadian dollar has plummeted along with the price of oil, and the bank may not have wanted to see a further sharp decline in the currency.

The trend-setting policy rate sits at 0.5 percent. Bank governor Stephen Poloz dropped the rate twice last year to absorb the impact of sliding oil prices.

The bank on Wednesday also downgraded its 2016 growth projection to 1.4 percent from its fall forecast of 2 percent.

Canada is the world's 11th-biggest economy. New Liberal Prime Minister Justin Trudeau has vowed to spend billions on infrastructure in an effort to stimulate the economy when his budget announced in weeks.

Poloz said the economy appears to have stalled in the fourth quarter of 2015 and said bank officials went into the meeting with a bias toward cutting. But he said they had to take into account the government's looming stimulus package and the impact of the sharp drop in the Canadian dollar, which has made imported items more expensive for Canadians.

He said exports will get a boost from the lower Canadian dollar but said that takes time.

"The drop in oil and other commodity prices constitutes a significant setback for the Canadian economy and has set in motion a protracted adjustment process," Poloz said. "That will mean the continuation of a two-track economy, with the resource sector shrinking and other sectors picking up speed, all facilitated by a lower Canadian dollar."

CIBC economist Nick Exarhos said in a note that Poloz is waiting to see what the government's stimulus package adds to the policy mix rather than adding more stimulus from monetary policy.