Economists are debating the timing, and extent, of the central bank’s first rate moves, and some now suggest they will start earlier than they had initially forecast.

The Bank of Canada is on heightened alert for inflation and a stronger recovery than it had bargained for.

 The central bank continues to hold interest rates at historic lows but is signalling to markets that inflation is running slightly higher and the economy, driven by “vigorous domestic spending” and a gradual recovery in exports, is expanding somewhat faster than it had projected, a juggling act for Governor Mark Carney.

 Mr. Carney and his fellow policy makers at the Bank of Canada are now under more pressure in terms of how they time the first interest-rate hike after a lengthy run at near zero, economists say, and the next reading of inflation, due March 19, could be crucial to their thinking.

 The economy grew in the fourth quarter at a 5-per-cent annualized pace, according to fresh data from Statistics Canada this week, while the Bank of Canada’s favoured measure of consumer prices – so-called core inflation, which strips out volatile items such as fuel – is at 2 per cent. The central bank targets 2-per-cent overall inflation; the core reading helps guide monetary policy, and it was initially not projected to reach that level until the second half of next year.

 The Bank of Canada kept its benchmark overnight rate at 0.25 per cent yesterday, and promised again to hold it there through the end of June depending on the outlook for inflation. A second month of faster-than-expected price gains would increase the stakes as Mr. Carney approaches the point where he will lay out how the central bank plans to begin returning rates to pre-crisis levels. He has already sent a message of sorts, warning late last year that Canadians should not take on more debt than they can handle when borrowing costs rise.

 Economists are debating the timing, and extent, of the central bank’s first rate moves, and some now suggest they will start earlier than they had initially forecast.

 Exactly when Mr. Carney will lift interest rates from the current record-low level, and how sharply, are still matters of intense debate among economists, not to mention within the central bank. But after Mr. Carney acknowledged just how rapidly inflation and the economy are picking up steam, Toronto-Dominion Bank, the biggest of the few remaining financial institutions insisting policy makers wouldn’t raise rates until late this year, changed its forecast for the first hike from October to July.

 Eric Lascelles, chief economics and rates strategist at TD Securities, said that while the global picture is “greatly in flux” as economies around the world are gingerly weaned off of stimulus, the central bank’s statement yesterday signalled a “change in tone.”

 “If you’re a central bank worried about rapid household debt-buildup, which the central bank has been, then you’re getting itchy,” added Michael Gregory, senior economist with BMO Nesbitt Burns.

 Still, some economists say the January gain in inflation was a function of the huge price drops around the world in January of 2009, so it’s questionable whether inflation in February from a year earlier will turn out to have been as pronounced.

 Also, Mr. Carney’s statement attributed the surprisingly high inflation rate in January to “transitory factors” as well as faster-than-anticipated growth. That could refer to higher auto prices – which may not be sustainable in future months if negative publicity plaguing Toyota Motor Corp. ripples through the industry – or home prices, which are expected to cool over the next year as builders increase supply and amid stricter mortgage rules that come into effect next month.

 So far, central bankers haven’t officially revised their view that the economy won’t be running at full tilt until 2011, saying Tuesday that influences on inflation include “slowing wage growth, and overall excess supply.” Mr. Carney and his deputies also repeated that “persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags.”

OTTAWA — From Wednesday’s Globe and Mail Published on Wednesday, Mar. 03, 2010 12:00AM EST Last updated on Thursday, Mar. 04, 2010 3:22AM EST