Fearing that a rebounding Canadian economy will drive inflation, the Bank of Canada increased its key target for the overnight rate by one-quarter of a percentage point, to two-and-a-half percent on Tuesday.

The bank rate is also increased by a quarter of a point to two-and-three-quarters percent.

Canada's overnight rate is the equivalent of the US Fed Funds rate.

The increase is at the lower end of market expectations, with analysts predicting before the announcement, an increase of either a quarter point or a half point.

Announcing its decision, the central bank said that since its last increase -- also by one quarter of a point -- on April 16, indications were that "the economic recovery in Canada has been somewhat stronger than anticipated."

And, the bank noted, core inflation in April rose to 2.2 percent, "slightly above the level that had been projected."

Total inflation, as measure by the consumer price index (CPI) was 1.7 percent.

"Today's interest rate," said the bank, "represents a further reduction in the substantial amount of monetary stimulus in the economy ... the bank will take the necessary action to keep inflation at its two percent target over the medium term.

"This will contribute to sustaining economic activity at full capacity."

During the economic slowdown of 2001, especially in the period immediately following the September 11 terror attacks on the United States, the Bank of Canada dramatically slashed interest rates in action parallel to moves by the US Federal Reserve.