Bank of Canada governor David Dodge warned Wednesday that overall inflation in Canada is moving up faster than expected because of the sharp rise in energy prices.

But he said that shouldn’t spill over into core inflation, which the bank likes to keep at about 2%. The core rate is most closely watched by policy makers and excludes eight volatile items including energy and food.

“It is important to note that while higher oil prices may push up the total CPI over the next few months, they should not feed through into higher trend inflation, as long as inflation expectations remain anchored around the 2% target,” Dodge said in a speech to the Hamilton Chamber of Commerce.

Dodge repeated the bank’s predictions that GDP growth this year should average 2.75%, rising to 3.75% in 2005.

Central bankers are scheduled to update their overall view of the economy in a monetary policy report on July 22, two days after its next rate-setting opportunity.

Dodge didn’t comment directly on the outlook for interest rates for Canada, but his speech suggested increases are on the way as economic growth picks up. He noted that one of the adjustments underway in the global economy is the return to more normal interest rates.

“After the global economic slowdown of 2000 and the terrorist attacks of 11 September 2001, central banks around the world lowered their policy interest rates to provide the liquidity to help their economies recover and absorb excess capacity,” Dodge said. “The world economic recovery we are seeing is due, in large part, to accommodative monetary policy—that is, historically low interest rates. Through 2003 and the early part of 2004, interest rates in some countries hit their lowest levels in 50 years, and global credit conditions were very expansionary.”

But Dodge said as growth resumes and economies get closer to their production capacity, inflationary pressures start to build.

“So central banks in many countries will have to remove some of the stimulus, and interest rates around the world will have to return to more normal levels … There is no doubt that over the next year, we will see upward adjustments in policy interest rates around the world. The timing and the magnitude of these adjustments will vary from country to country, according to each one’s economic circumstances.”

Dodge’s comments came a week after the central bank left its key policy interest rate at an even 2%. However, analysts widely expect Dodge will begin to nudge up borrowing costs by this fall.