Rising oil prices shouldn’t hold back the Canadian economy, the chief economist for BMO Financial Group said Tuesday.

Tim O’Neill, the bank’s executive vice president, said climbing oil prices would not alter the forecast significantly since any dampening effect on industrial production or exports will be largely offset by increased income growth in Canada’s energy sector.

O’Neill said in a speech in Ottawa that he is forecasting 3.5% growth in Canadian gross domestic product from the fourth quarter of this year to the fourth quarter of 2005. He said that despite rising interest rates and oil prices, and a strengthening dollar, the Canadian economy will continue to grow steadily over the next 18 months.

At the same time, O’Neill foresees interest rates will rise another 50 basis points by the end of this year, a further 75 bp in 2005, and a full percentage point more by mid-2006. This would bring Canada’s overnight rate to a near-term peak of 4.5% — twice as high as today. He expects interest rates in the U.S. to reach similar levels by the fall of 2006.

Inflation in Canada over the period, excluding energy costs, will continue to run below 2%, he said. The Canadian unemployment rate will also remain fairly constant, near 7%.