Reuters - The Bank of Canada raised its key interest rate, as expected, but warned the domestic and global recovery will be slower than it had previously forecast, suggesting any further hikes may be gradual.

The bank last month became the first in the Group of Seven advanced economies to raise rates from the emergency lows introduced during the global crisis. It took a second step by lifting borrowing costs another 25 basis points to 0.75 percent.

Canada's blistering growth rate and jobs growth had led primary securities dealers to unanimously predict another rate hike, putting Canada leagues ahead of the U.S. Federal Reserve and other G7 central banks who are not yet ready to end the era of easy money.

But its hawkish stance on rates contrasted sharply with the dovish language in its accompanying statement. It shaved its growth forecast for the Canadian economy this year to 3.5 percent from 3.7 percent and said efforts to tackle the European debt crisis would slow the pace of the global rebound.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the bank said in its announcement.

That language was identical to its June 1 rate hike announcement.

In a Reuters poll conducted last week, over half of those surveyed expected the central bank to pause in its rate-tightening cycle at some point later this year.

That puts Canada in the same basket as other commodities exporters like Brazil, which is expected to hike its rates on Wednesday but pause some time soon on signs that strong growth is cooling.

"This is consistent with a very, very gradual removal of policy stimulus," said Sheryl King, chief Canadian economist at Bank of America Merrill Lynch.

Sal Guatieri, senior economist at BMO Capital Markets, said the bank likely felt compelled to bring rates back to levels that are more in synch with an economy that is creating jobs and absorbing excess slack. But Bank of Canada Governor Mark Carney may not want to tighten at each of its remaining three meetings this year in September, October and December.

"It looks like all that fiscal retrenchment coming down the pipeline in Europe and eventually in the United States will dampen the economic outlook externally and that, of course, has implications for Canada," Guatieri said.

RECOVERY DELAYED

The bank cut its growth outlook for next year to 2.9 percent from 3.1 percent but raised its 2012 forecast to 2.2 percent from 1.9 percent.

The bank now sees the economy returning to full capacity by the end of 2011, two quarters later than it estimated in its April Monetary Policy Report.

"This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada," it said.

The domestic growth is fueled by government and consumer spending and while jobs growth has resumed, the housing market is cooling from the heated activity of last year and business investment has not yet bounced back from its sharp contraction during the recession, the bank said.

However, inflation is behaving as it anticipated and will likely remain near the bank's 2 percent target through the end of 2012.

The bank will provide more detailed forecasts and assumptions underlying them in the quarterly Monetary Policy Report later in July.

The global economy is growing but is not yet self-sustaining without the help of fiscal and monetary stimulus, the bank suggested.

A greater focus on debt reduction and austerity around the world could have spillover effects in Canada.

"While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long-term growth, it is expected to slow the global recovery over the projection horizon," it said.