The Bank of Canada warned Wednesday that it will likely have to raise interest rates to push down inflation and keep the economy from overheating.

In its latest monetary policy report, the bank said both core and total consumer price index inflation have been well above the 2% inflation target.

The bank said that it expects the core inflation rate, to remain near 3% through the middle of this year. The rate is expected to return to 2% by early 2004. The central bank aims to keep the core inflation rate within 1% to 3%.

The bank said that some of the geopolitical and financial uncertainty has lifted that it expects that it will continue to recede. However, the bank said that a degree of global economic uncertainty remains. It drew attention to the possible economic impact of severe acute respiratory syndrome, particularly in the Greater Toronto Area.

Overall, the bank said that the risks confronting the world economy now appear to be better balanced compared with last autumn, and by year-end, business and household confidence levels should be higher.

It forecasts that economic activity should begin to strengthen towards the end of this year and through 2004, particularly in North America. In Canada, most of the small amount of economic slack that is likely to open up during 2003 will have closed by the end of 2004.