Canada's central bank on Thursday bumped up its growth forecast for the economy this year, but also said inflation will run higher than expected.

The Bank of Canada said growth this year is now expected to come in at 2.5 per cent — which is up from the 2.2 per cent rate of expansion it predicted back in April.

The bank said the economy has been running strong recently on very healthy consumer spending and firm commodity prices.

For 2008 and 2009, the bank now sees growth averaging about 2.5 per cent. In April, the bank said it was looking for growth of 2.7 per cent in both years.

The inflation rate is also predicted to increase to a peak of three per cent in the last three months of this year. Cooling demand should bring the inflation rate back down to two per cent by early 2009.

Faced with strong economic growth and inflation pressures, the bank bumped up the cost of borrowing on Tuesday. It raised its key overnight rate by 0.25 of a percentage point to 4.5 per cent. The bank also suggested it may need to make some more "modest" increases to bring inflation back down to its two per cent target.