Key Rate Unchanged

Canada's central bank held its key interest rate at a record low 0.25 percent on Tuesday and reaffirmed that it expects it will keep the rate steady until July. But the bank also signaled it is getting closer to raising rates.

The Bank of Canada said the 5 percent economic growth Canada saw in the fourth quarter was slightly higher than expected. It said growth has been "spurred by vigorous domestic spending and further recovery in exports" and cited low rates, increased confidence and global growth as reasons.

The bank said the persistent strength of the Canadian dollar and weak U.S. demand continue to act as significant drags on economic activity in Canada. About 80 percent of Canada's exports go to the United States. A higher Canadian dollar hurts exports.

But the bank said the risks to Canadian inflation are now "roughly balanced." Previous statements have said the risks were lower.

Some of Canada's top economists took the bank's changed assessment to mean rates will go up once the conditional commitment ends in July. The Canadian dollar strengthened almost a cent, to U.S. 96.80 cents after Tuesday's statement was released.

Avery Shenfeld, senior economist at CIBC World Markets, said the bank has taken the first steps to set up for a rate hike in July. He expects rates to rise as "as soon as the commitment to keep on them hold until the end of June has passed."

TD Bank chief economist Don Drummond said he thinks the central bank could wait until the September meeting and said he expects Canada to raise rates before the U.S. does.

Royal Bank Chief Economist Craig Wright also expects Canada to raise rates before the U.S. He said Canada's central bank is setting the markets up for an eventual move toward normalizing interest rates with its wording on inflation expectations.

"That to me suggests they are a little bit more worried than they were a short while ago but not enough to shake them off the conditional commitment," Wright said.

Unlike the U.S., Canada has not experienced the failure of any major financial institution. There has been no crippling mortgage meltdown or banking crisis north of the border, where there is greater oversight of mortgages.

The federal government tightened mortgage lending rules last month as historic low rates are raising fears of a potential housing bubble. Wright said some have taken the bank's vow to keep interest rates at an historic low to mean they will always stay that way.