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Bank of Canada raises rate to 3%

By TAVIA GRANT

Tuesday, October 18, 2005 Posted at 9:22 AM EDT

Globe and Mail Update


The Bank of Canada raised its key lending rate Tuesday to 3 per cent from 2.75 per cent, its second consecutive hike in as many months, and suggested more rate hikes are on the way as inflation accelerates. The central bank cautioned that the global economy could slow by 2007.

The move was widely expected by economists. Twenty-eight of 29 economists polled by Bloomberg had expected rates to raise by 25 basis points Tuesday. Sixteen of 18 expect another quarter-point increase in December. (A basis point is 1/100th of a percentage point.)

In a release, the central bank said it sees higher energy prices pushing consumer prices to almost 3 per cent, before inflation eases to 2 per cent in the second half of 2006. It indicated more rate hikes on the horizon.

“In line with the bank's outlook, and given that the Canadian economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target,” it said.

The rate now stands at the highest in more than two years.

The bank cautioned that global economic growth could slow in the years ahead.

“As we look further out to 2007 and beyond, there are increasing risks that the unwinding of global economic imbalances could involve a period of weak global growth,” it said.

The Canadian dollar was little changed, trading at 84.64 cents (U.S.) from Monday's close of 84.81 cents.