March 7 (Bloomberg) -- The Bank of Canada raised its main interest rate for the fifth straight time and changed its language to say another increase was less certain, causing the currency to fall by the most in two months.

The quarter-point increase today brings the target rate for overnight loans between commercial banks to 3.75 percent, the highest since September 2001, and narrows the gap with the 4.5 percent U.S. federal funds rate. All 34 economists polled by Bloomberg News predicted the move.

``Some modest further increase in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target,'' the central bank said in a statement from Ottawa. The last rate statement on Jan. 24 said a modest rate increase ``would'' be required, instead of today's ``may.''

Consumer spending and record prices for exports of natural gas and crude oil have helped Canada's economy expand for 10 straight quarters. With companies working at full capacity, inflation may accelerate, Governor David Dodge has said in recent speeches.

Today's statement is ``a lot less definitive'' about further rate increases, Andrew Pyle, senior financial economist at Scotia Capital, said in an interview from Toronto. ``Rate hikes beyond April could be drawn into question if the dollar continues to move higher,'' he said. The next rate announcement is April 25.

Currency Outlook

The Canadian dollar fell to 86.97 U.S. cents at 3:35 p.m. Toronto time from 87.77 cents late yesterday. The prospect of fewer rate increases makes buying Canadian-dollar assets that earn interest less attractive to some investors. The Canadian dollar reached a 14-year high of 88.49 U.S. cents on March 2, capping a 29 percent rise over the past three years, the biggest among 16 major currencies except for Brazil's real.

Canada's currency has gained more than expected since late January, the central bank said today, without elaborating. The Bank of Canada's Monetary Policy Report in January based its currency forecast on futures contracts, not a prediction by its analysts. Inflation and economic growth have advanced as expected, and the economy remains at full capacity, the Bank of Canada said today.

``The economy is performing reasonably well and interest rates, while they are raising them, are still pretty low,'' said Rick Egelton, chief economist at Bank of Montreal in Toronto. He predicts the Bank of Canada will raise the overnight rate another quarter point to 4 percent in April and to 4.5 percent by year-end.

Other major central banks are raising rates to control inflation. The Fed will probably raise rates a quarter point on March 28, the 15th straight move, according to a Bloomberg survey from Jan. 31 to Feb. 8. European Central Bank President Jean-Claude Trichet said yesterday he may raise rates again after a March 2 increase that was the second in three months.

Consumer Prices

The Bank of Canada sets the target rate for overnight loans between commercial banks to keep the consumer price index at 2 percent. Canadian consumer prices rose 2.8 percent in January from a year earlier, Statistics Canada said Feb. 22, led by energy costs.

High energy prices and rising exports have also created record Canadian trade surpluses, boosting the currency as companies brought home profits earned in U.S. dollars. Energy investments helped reduce Canada's unemployment rate to a three-decade low of 6.4 percent in November and led economic growth of 2.5 percent in the fourth quarter, faster than U.S. growth of 1.6 percent.

Petro-Canada and Shell Canada Ltd. are investing billions of dollars this year to increase capacity, helping to expand the domestic economy as well. Commodities make up 35 percent of Canada's exports and 10 percent of gross domestic product, shares that may rise because Alberta's tar-like oil-sands are estimated to contain the most oil outside the Middle East.

Energy

The growing economy has given Dodge, 62, the freedom to embark on the longest series of rate increases since he joined the central bank in February 2001.

The yield on the benchmark 10-year Canadian government bond has risen as much as 44 basis points since Dodge started raising rates in September, and yesterday the yield reached an 11-month high. The yield on the 4.5 percent coupon bond due June 2015 fell 5 basis points to 4.22 percent today. A basis point is 0.01 percentage point.

Higher interest rates and energy costs and the rising dollar have squeezed Canadian factories. Manufacturers fired 41,600 workers in January, the most since February 1991, during Canada's last recession. Factory employment has dropped by 145,000 in the past 12 months, or by 6.4 percent.

`Even Worse'

``If they keep going, it's going to make things even worse for manufacturers,'' said Jean-Michel Laurin, vice president of research for the Canadian Manufacturers & Exporters' Quebec division in Montreal. ``Most companies don't have a cost structure to be competitive at an 88-cent dollar.''

The Forest Products Association of Canada and the Canadian Labour Congress, which represents 3 million union workers, also said today's rate increase will hurt manufacturers.

Egelton of Bank of Montreal said the rate increases aren't the main cause of the currency's rise.

``It's because commodity prices are so strong and we are running record trade surpluses despite the high value of the currency,'' he said.

Governor Dodge agrees in part with manufacturers about economic risks. Dodge has said in recent speeches the global economy is threatened by record U.S. trade deficits and a possible sudden depreciation of the U.S. dollar against other currencies. Countries might also react to those problems with increased trade protectionism, Dodge has said.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

Last Updated: March 7, 2006 15:57 EST