Bank of Canada Governor David Dodge said today that interest rates will have to rise, but he did nothing to suggest an accelerated schedule for hikes.

Dodge commented on interest rates in a speech to the Winnipeg Chamber of Commerce, which focused on the adjustments that Canadians are making to help the economy thrive in a changing global economic environment.

Dodge said that throughout Canada, “individuals, businesses, industries, and public sector institutions are making the adjustments that will help them improve their competitiveness and seize new opportunities. These efforts also make the Canadian economy stronger and more resilient.”

He added that people throughout the world are being affected by the same powerful forces-growing competition from emerging-market economies, such as China and India, and large and growing financial imbalances in the United States and Asia. “The growth of emerging-market economies has driven up demand for commodities, and that has pushed up the world prices for oil and many other commodities that we produce in Canada. Meanwhile, the more competitive world environment and productivity improvements in some countries are lowering the prices for a number of consumer goods, communications services, and computer equipment,” he said.

These forces are causing significant exchange rate movements too, he said, including a sharp appreciation of the Canadian dollar against the U.S. dollar over the past couple of years.

The adjustments firms are making are leading to investment spending being directed towards increased specialization, higher productivity, and lower costs. Whereas stiffer competition is encouraging firms to seek new markets, increase their specialization, and offer more value-added, customized services. A growing number of firms are also looking to cut costs by importing more inputs, and other firms are phasing out the production of goods and services with low profit margins and concentrating on those which yield higher returns.

Through its monetary policy, the Bank is helping these adjustments by supporting domestic demand, dodge said. “We continue to see evidence that strong domestic demand is offsetting the smaller contribution that net exports are making to economic growth,” he said.

Dodge added that the Bank is in the process of gathering and analyzing the full set of information on the global and the Canadian economies that will feed into its next interest rate decision, and into the Monetary Policy Report Update to be published on July 14.

“On our last policy-announcement date in May, we decided to maintain the target for the overnight interest rate at 2.5%. At that time, we indicated that global and Canadian economic developments had been unfolding broadly in line with our expectations and that our outlook for the Canadian economy through to the end of 2006 was unchanged from the one we presented in our April Monetary Policy Report,” he said, while noting “the analysis contained in that Report is still relevant. So is our statement that, in line with this outlook for growth and inflation, a reduction of monetary stimulus – that is, an increase in our key policy rate – will be required over time.”