Bank of Canada Governor David Dodge said Wednesday that Canadian interest rates will be going higher, although the timing remains uncertain.

During a speech in London to the Canada-UK Chamber of Commerce, Dodge said inflation is currently above the bank’s 2% target range and the economy is near full capacity despite war jitters.

“While we continue to foresee growth somewhat below potential in the first half of this year, we expect increased demand in the second half of 2003 and into 2004, as global uncertainties diminish. But with an appropriate reduction in the amount of monetary stimulus, we see the level of output remaining close to capacity during this year and into 2004,” he said.

Dodge added that further reductions in monetary stimulus will be required to return inflation to the target over the medium term.

He noted that the world’s nations are facing a time of great economic and political uncertainty. While rates are certainly going higher in Canada, there are risks to the outlook, as “most other countries are facing very weak demand and lacklustre economic prospects. And, of course, there is the overriding prospect of a war in Iraq.”

Dodge credited Canada’s recent economic strength to a combination of good luck, and efforts made during the 1990s to get monetary and fiscal policies right.

There’s growing speculation that the U.S. Federal Reserve may cut interest rates at its policy setting meeting next week. The latest U.S. employment report showed an economy that shed more than 300,000 jobs in February.