* Poloz dampens talk of possible interest rate cut
* Says central bank has expressed neutrality on next move
* BoC balancing low inflation with financial system risk
* Says up to market to set C$ level
By Louise Egan
MONTREAL, Dec 12 (Reuters) - The Bank of Canada is likely to keep interest rates on hold "for quite some time," Governor Stephen Poloz said on Thursday, dampening talk that it was edging closer to cutting rates in order to combat low inflation.
In a speech in Montreal, he said the central bank was more worried about downside risks to inflation than upside ones since inflation is well below a 2 percent target, but he stopped short of hinting at any easing.
Asked at a news conference afterwards whether it was accurate that the bank was getting ready to cut, he said: "We don't know. We've expressed our neutrality on that question, which is to say that we're even-handed on the two sides of it at this stage, given what we know today."
He said the bank's move in October and again this month to stop referring to future rate hikes, following 18 months of more hawkish language, was a shift to honesty rather than dovishness.
"All we're really doing is being honest that at this stage we think that interest rates will stay where they are for quite some time, so issuing a warning they're almost ready to go up is not the right timing for this," he said.
"Of course, we believe it will happen as the story unfolds but the destination seems far enough away that we can address that as we get closer," he said.
CIBC World Markets economist Emanuella Enenajor said the appearance was "potentially disappointing for those who may have been looking for Poloz to sound more dovish or talk down the currency."
The Canadian dollar and interest rate futures were little changed following the speech and press conference.
The central bank has held its key overnight rate at a near-record low of 1 percent since September 2010.
On Oct. 23 it dropped any reference to tightening rates. The central bank sounded a touch more dovish on in its Dec. 4 statement, saying the downside risk to inflation appeared to be greater than before.
Analysts surveyed by Reuters before the Dec. 4 decision forecast the bank would begin raising rates in the second quarter of 2015.
But the statement earlier this month sparked some market chatter that the bank might suggest rate cuts, especially if inflation remains weak in coming months. The annual inflation rate in October dropped to a five-month low of 0.7 percent, outside the target range of 1 percent to 3 percent.
"As our inflation target is symmetric, we care about both the upside and downside risks to inflation. When we are already below target, as we are today, we care more about downside risks than upside ones," Poloz said in his speech.
"We are prepared to remove monetary stimulus when it's no longer needed to offset the forces that currently are pulling inflation below target," he said, repeating the bank's view that it would take around two years to get inflation back to the "sacrosanct" two percent target.
Poloz twice batted away questions about whether the Canadian dollar value was appropriate.
"The Canadian dollar is determined in the markets. We're focused on inflation, as I've just made really clear. The Canadian dollar will be whatever it's going to be as markets grind that out, and so the simple answer to your question is it's always the right value because the market always gets it right," he said.
He also said a stable financial system was needed to keep inflation low and predictable and limit the risk of deflation.
Poloz said there was a risk that soaring household debt, which is linked to the heated housing market and is fueled in part by low interest rates, could keep rising and prompt a sharp correction.
"Our current monetary policy weighs this risk against the risk of inflation falling even further below target. This zone of balance is relevant today and in prospect, as we expect both risks to diminish over the next two years or so," he said.
The ratio of household debt to income rose to a record high 163.4 percent in the second quarter, Statistics Canada said in September.
The ratio for the third quarter will be released on Friday at 8:30 a.m. EST (1330 GMT).