The Bank of Canada left its key policy interest rate unchanged Tuesday but broadly hinted that higher rates are on the way.

As was widely expected, the central bank left its trend-setting overnight rate at 2.5% but suggested the economy finally seems to be coping with a higher dollar and other international pressures.

That was a broad hint from the central bank that it will likely have to raise rates before yearend to head off inflation. “There is increasing evidence that the Canadian economy is adjusting to global developments,” central bankers said in a statement.

Many experts predict the central bank will hold the line over the next several months but by autumn will begin to again raise borrowing costs to keep inflation in check.

The central bank likes core inflation – which strips out volatile food and energy items – at about 2%, figuring that permits healthy growth without triggering price pressures.

It predicts the core rate will settle at 2% “round the end of next year” as the economy is expected to reach full growth by the second half of 2006. “In line with this outlook, a reduction of monetary stimulus will be required over time,” central bankers said.

Sluggish GDP growth forced the Bank of Canada earlier this year to trim its economic forecast to just under three per cent for 2005 – roughly in line with many private-sector analysts.