The Bank of Canada raised its trend-setting interest rate on Tuesday for the second time in less than two months despite growing uncertainty over the domestic and global economic outlook.

Even as the bank lifted its overnight lending rate to 0.75 per cent from 0.5 per cent, it said that it expected the recovery in Canada to be more gradual than projected in the spring.

The bank lowered its 2010 growth forecast to 3.5 per cent, adjusted for inflation, from April’s 3.7 per cent estimate. Next year’s growth rate is now projected at 2.9 per cent, down from the previous 3.1 per cent.

The revisions stem mainly from the slowing global economy and more modest growth in domestic consumer spending, the bank said.

Jimmy Jean, economist at, said that the continuing rise in interest rates reflects the bank’s eagerness to move gradually towards a more normal monetary policy rather than face the risk of being forced into more aggressive tightening later.

The buoyancy of Canada’s economy compared with most other industrial countries, especially the US, “is an advantage that the Bank of Canada has, and it’s one that they’re using”, Mr Jean added.

One of the brightest signs has been a resumption of employment growth, with 93,200 jobs created in June, far exceeding analysts’ expectations. The unemployment rate is now at 7.9 per cent, its lowest since early 2009.

Canada has out-performed its southern neighbour largely because of the resiliency of its housing market and more stable banking system. Sub-prime mortgage lending played a negligible part in the Canadian market, and banks north of the border were more conservative in their exposure to toxic securities.

House prices in Toronto and Vancouver reached new records earlier this year, but the market has cooled in recent months.

Andrea Morrison, a Toronto real-estate agent, said on Tuesday that “with the higher interest rates, people will be a little slower to make a decision. We’re not going to have as much fury, but we’ve still got a great market”.

Economists have cautioned that with consumers starting to tighten their belts, Canada is now more vulnerable to a dip in commodity prices and a slowdown in the US, which buys about three-quarters of its exports. The federal government is also preparing to wind down a two-year fiscal stimulus package.

Meanwhile, the prospect of higher interest rates has attracted a record inflow of foreign capital . Foreigners bought a record C$23.2bn of Canadian securities in May, almost double April’s inflow. The previous monthly record of C$21.4bn was set in early 2004.

The Canadian dollar, known as the loonie, fell slightly to 94.60 US cents after the Bank of Canada’s interest-rate announcement on Tuesday. The currency broke through parity with the US dollar earlier this year but has sunk back in line with sagging commodity prices.

Warren Lovely, an economist at Canadian Imperial Bank of Commerce, told clients last week that “Canada is increasingly on the lips and minds of international investors. It's hard to recall a time when the country possessed such relative, if not absolute, strength."

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