The Bank of Canada left its key overnight rate unchanged at 4.25 per cent while the Canadian dollar shot above 93 cents for the first time in 30 years.
The Bank of Canada warned Tuesday that it's prepared to hike interest rates to help curb inflation.
The central bank said the economy is exceeding its expectations.
"It is a little stronger than the Bank of Canada had thought, so what they are saying is that benchmark interest rate may have to be raised a little bit later this year," Business News Network's Michael Kane told 愛污传媒net.
The loonie rose almost three-quarters of a U.S. cent to 93.29 cents US, which is its highest level since September 1977.
The warning could prompt a rate increase as soon as July 10, the next scheduled date for announcing the overnight rate.
Private economists and bank watchers have speculated that bank governor David Dodge would not raise interest rates without first preparing the markets for change in policy.
Observers noted Tuesday's report was as clear a warning as ever that the central bank intended to raise interest rates.
"This statement blows open the door to what we believe will be the first of two 25 basis-point increases in the overnight rate starting July 10,'' David Tulk, a senior economist with the TD Bank said.
"At the end of the day, the Bank of Canada is an inflation-targeting institution and must therefore react to a rate of core inflation that is now bouncing significantly above the two per cent target.''
Referring to its April monetary report when it concluded the economy was progressing as expected, the Bank of Canada conceded it had missed the mark on all important indices in the first quarter.
Core inflation, at 2.5 per cent, was also above expectation in April, well ahead of the Bank of Canada's 2-per cent forecast.
The gross national product, which it had predicted would expand by 2.5 per cent during the first quarter, is now likely to register a 3.5 per cent growth rate for the first quarter.
As well, the Canadian dollar has risen well above the range of 86.5 cents to 89.5 cents US the bank had forecast and has recently traded well above 90 cents.
The bank said it now concludes there is a greater excess demand in the economy than it judged in April.
"On balance, the bank judges that there is an increased risk that inflation will persist above the two per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target," it said.
The bank also said the weak U.S. economy was moving as was expected.
While this is generally considered bad news for Canada, the robust growth of the world economy has offset any potential impact.
Prices are kept high by the continuing global demand for Canadian commodities such as oil and minerals, the bank said.
''Against this overall backdrop, the Canadian dollar has risen appreciably,'' it said.
The news pushed the Canadian dollar up to 93.03 cents US -- from 0.46 of a cent in early trading.
The bank last changed the interest rate in May of 2006, when it was bumped up a quarter-point.
With files from The Canadian Press
