OTTAWA, July 15, 2008 (AFP) - The Bank of Canada announced Tuesday that it was maintaining its 3.0 percent key lending rate, citing concerns over rising inflation due to higher energy prices, and a sluggish US economy.

The protracted weakness in the US economy, ongoing turbulence in global financial markets and a sharp increase in commodity prices 'pose significant upside and downside risks,' the central bank said in a statement.

Commodity prices are continuing to outstrip earlier expectations, boosting trade and real national income, while contributing to domestic and global inflation, it said.

In the second quarter, the Canadian economy was in 'slight excess supply' and is expected to increase throughout the year, the central bank said.

Increased trade and a gradual recovery of the US economy are expected to boost growth starting in early 2009, bringing the economy back to full capacity around mid-2010, it said.

Canada's gross domestic product (GDP) is projected to grow by 1.0 percent in 2008, 2.3 percent in 2009, and 3.3 percent in 2010.

Inflation is expected to be much higher than previously projected, rising temporarily above four percent, peaking in the first quarter of 2009.