OTTAWA - The Bank of Canada is signaling that it's still concerned about inflation, which it warns could reach three per cent by year's end.
The warning comes two days after the bank raised its key interest rate to 4.5 per cent to cool off the hot economy.
In an update to its semi-annual monetary policy report, the central bank says both economic growth and inflation in the first half of the year were stronger than expected in April.
The report projects inflation could rise to three per cent in the final three months of 2007, a full percentage point above the bank's two per cent target.
The bank says economic growth of 2.5 per cent is now expected this year, higher than the growth rate projected just three months ago.
But it says growth will likely be slower than earlier forecast in 2008 and 2009, largely due to higher interest rates and the strength of the Canadian dollar.
On Tuesday, the bank raised its key policy interest rate by one-quarter of a percentage point to 4.5 per cent, and indicated that a further modest increase may be needed to bring inflation back in line with expectations.
