Canada’s economy will continue to grow at close to potential for the next two years, the Organization for Economic Co-operation and Development forecast in its latest report.

The OECD expects Canada’s economy to grow by 3.2% in 2006 and 3.1% in 2007, up from 3% this year.

However, the organization strongly advised Canada to raise its interest rates to keep inflation in line.

The Bank of Canada “will need to continue” to move interest rates higher, the OECD warned in its Economic Outlook yesterday. “Given the buoyant macroeconomic outlook, any additional fiscal stimulus should be avoided,” it said.

In its report, the OECD, suggested that the central bank should increase its overnight lending rate to 4.25% by the end of 2007. The bank has already raised its rates twice since September, to 3%.

The next rate-setting meeting is scheduled for December 6.

Apart from its warning on inflation the OECD was full of praise for the Canadian economy. The economy has proved to be “extremely resilient” in recent years, it said, and that is allowing the country to handle a sharp rise in the Canadian dollar, compared with foreign currencies, and a coming slowdown in domestic demand.

Although energy prices have pushed inflation above normal targets, the OECD said that is largely a temporary phenomenon. It added that improvements in the world economy should make up for any declines in the domestic market.