Interest rates set to rise?

Mark Carney, governor of the Bank of Canada. (JOCELYN MALETTE/QMI Agency)

Mark Carney, governor of the Bank of Canada. (JOCELYN MALETTE/QMI Agency)

Mark Dunn Senior National Reporter

, Last Updated: 12:39 PM ET

OTTAWA - The days of cheap money could be coming to an end.

It will likely cost more to borrow before the end of the year, the Bank of Canada broadly hinted Tuesday after keeping the overnight rate steady at 1%.

With an improving global economic outlook, the bank is considering gradually bumping up the benchmark if conditions continue - a move that would hit debt-laden Canadians in the wallet after a record run of bargain-basement rates.

The bank had been widely expected to maintain its rate throughout this year - similar to the U.S. - but a strengthening European economy and signs the American economy is showing life may force the bank's hand sooner.

The banks says it's more positive about the volatile European debt crisis than it has been and expects Europe to emerge slowly from recession in the second half of 2012 - though serious risks still lurk that could derail those expectations.

The bank was more optimistic about Canada's largest trading partner after nearly three years crawling from the 2008-09 financial meltdown.

"The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously expected," the bank said in its monetary policy report.

The bank said that while things are gradually improving, Canada still has some hurdles to clear, including the impact of a strong dollar, high commodity and gas prices, supply disruptions and geopolitical risks.

And it singled out yet again consumer debt "which remains the biggest domestic risk" to the Canadian economy, which it expects to grow by 2.4% this year - up from the 2% it forecast in January.

It also expects inflation to hover around 2% through the first half of 2013 when the economy is forecast to return to full capacity.

"In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term," the bank said about the prospect of jacking up its rate.

Toronto Dominion economist Diana Petramala said when the bank decides to boost its rate, it will do so slowly.

"We anticipate that despite the change in language in (Tuesday's) announcement, rates will remain lower than normal for some time," she said.

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