The Bank of Canada surprised many observers by raising interests rates on Tuesday. The central bank is raising its target for the overnight rate by one-quarter of one percentage point to 3%.

The operating band for the overnight rate is correspondingly increased, and the Bank Rate is now 3.25%.

Owing to geopolitical risk and the impact on oil, and therefore inflation, the Bank of Canada expects the economy to grow again in the second quarter.

The majority of Bay Street economists were not expecting any change in interest rates, this morning, as the bank had a tough choice to make with mixed signals coming from the economy and an unstable geopolitical situation.

On Friday, Statistics Canada reported hat GDP for the fourth quarter of 2002 advanced just 0.4%, less than half the pace of 0.9% set in the third quarter. Meanwhile, January’s annual inflation rate came in last Thursday at a 12-year high of 4.5%.

Adding to the mood of caution is a report from StatsCan, today, that the Help-wanted Index was slightly down in February, slipping -0.2% to 111.4. The largest declines were in Quebec (-2.8%), Manitoba (-1.5%) and Prince Edward Island (-1.1%). Increases were recorded in New Brunswick (+2.4%) and Alberta (+0.9%). The index changed little in Ontario (-0.1%).

On the broader picture, futures trading is down this morning. U.S. equity markets were hit by a dismal manufacturing report by the Institute of Supply Management yesterday. European bourses are lower amid rising speculation that the U.S. will attack Iraq without United Nations endorsement.

The London FTSE 100 index is down 0.9% at midday, falling 32.1 points to 3,652.6. The Frankfurt DAX is down 1.5%, while the Paris CAC-40 slid 2.1%.

Asian markets were also weak in Tuesday trading. Japan’s Nikkei average fell 10.18 points to 8,480.22. The Hong Kong Hang Seng index fell 86.88 to 9,181.89.