The clock is ticking on Canada’s record-low borrowing costs, as inflation continues to move at a faster rate than the central bank had expected.

The hot reading on inflation issued by Statistics Canada Friday is raising expectations that the Bank of Canada could lift interest rates as early as June.

Economists, meanwhile, rushed to boost their growth forecasts as the country’s economic rebound gathers steam.

The inflation figures, along with a report that showed retailers are benefiting from higher prices, pushed the Canadian dollar well past 99 U.S. cents Friday morning, before it fell back to close at 98.39 U.S. cents.

Consumer prices climbed 1.6 per cent in February, a slower pace than the 1.9 per cent in the previous month, according to Statscan. But the core rate – which strips out volatile items such as fuel – rose to 2.1 per cent from 2 per cent.

The Bank of Canada is guided by the core rate. Policy makers hadn’t expected the core rate to reach the central bank’s 2-per-cent target until the third quarter of 2011.

That, coupled with an improving economy, means Bank of Canada Governor Mark Carney is likely to boost rock-bottom interest rates sooner rather than later, some economists say.

“We’re progressively leaving the recovery phase,” said Yanick Desnoyers, assistant chief economist at National Bank Financial in Montreal. Policy makers “are going to change their tone on the economy in April, and they’re going to move in June. The longer they wait, the more aggressive they’ll have to be.”

Mounting speculation that the central bank will begin boosting interest rates before the U.S. Federal Reserve moves has helped push the loonie close to parity with the U.S. currency.

Canada is on course to become the first in the Group of Seven – which also includes the United States, Great Britain, France, Germany, Japan and Italy – to raise borrowing costs since the global crisis. The U.S., in contrast, shows no signs of hiking rates any time soon. U.S. consumer prices last month failed to increase for the first time in almost a year, and producer prices dropped.

In Asia, however, inflation is roaring back as growth accelerates. India’s central bank surprised markets yesterday with a rate hike, calling a fight against inflation “imperative.” China, which the World Bank suggested this week should do more to keep a lid on a potential bubble in its property market, posted a 16-month high in its consumer price index last month.

Still, many economists said Canada’s core inflation numbers were skewed because of hotels in Vancouver that charged exorbitant rates during the Winter Olympics. In one case, a hotel that normally marketed itself as a discount option was charging $1,200 a night for a suite that sleeps six people, a steep markup from the usual maximum of about $280.

But Mr. Desnoyers noted that, assuming the “Olympic effect” temporarily added 0.2 percentage point to core inflation, a reversal of that boost would still leave the rate above the Bank of Canada’s 1.6 per cent projection for the first quarter.

“It’s going to be very hard to meet the Bank of Canada’s projected inflation path with the kind of numbers we’ve seen recently,” he said.

Retail sales, meanwhile, rose 0.7 per cent in January, Statscan said, largely because of a rush for home-improvement products before the federal government’s Home Renovation Tax Credit expired. In volume terms, overall sales were up just 0.1 per cent, which means the gains were driven by higher prices.

Mr. Carney pledged last April to keep the benchmark rate at 0.25 per cent through the middle of this year, or longer depending on the inflation outlook. He will update his inflation and growth forecasts during the week of April 20.

Increasingly, economists say if he doesn’t start tightening in June, then he’ll likely hike rates the following month.

Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said Mr. Carney may be getting an “itchy trigger finger” but will likely wait until July, having said in a March 11 speech that borrowing costs staying where they are until the end of June would be “appropriate.”

Nonetheless, Mr. Shenfeld said CIBC is now raising its first-quarter growth forecast to “roughly 5 per cent” from 4.1 per cent. Bank of Montreal deputy chief economist Douglas Porter said Friday that his firm has lifted its forecast to 4.7 per cent from 3.7 per cent, “and that may not be the final word.” If they’re right, it would be the second straight three-month period with growth at or close to 5 per cent. That compares with the central bank’s estimate of 3.3 per cent for the final three months of 2009, and its prediction of 3.5 per cent for January through March.

There is an outside chance Mr. Carney could use a speech in Ottawa on March 24 to lay the groundwork for a rate hike on April 20, but virtually all analysts say the earliest he could possibly tighten would be at a June 1 decision, and most maintain that he’ll wait until his next opportunity on July 20.

Most economists say Canada’s central bank will lift rates in increments of no more than 0.25 of a percentage point and may stop after a few moves to re-evaluate. That’s how the Reserve Bank of Australia has proceeded since last fall, when it became the first major central bank to tighten as the dust started to settle on the crisis.

Scotia Capital’s Derek Holt, who has said for weeks that Mr. Carney could start raising rates as early as next month, predicts “non-emergency, but low” rates for years.

With a report from Bloomberg News