TORONTO (Reuters) - The Bank of Canada's rate increase campaign should not hurt Canadian stocks as badly as past tightening cycles, given that only moderate moves are expected and rates will remain near record lows for some time.

Markets are betting on a 25 basis point increase tomorrow, which would bring the central bank's key interest rate to 0.75 percent. Last month Canada became the first Group of Seven industrialised nation to raise rates following the global financial crisis.

But analysts say the tightening, and other increases expected to follow, will have little impact on the TSX composite index. Instead, traders and money managers will be focused on the health of the global economic recovery.

"This move in interest rates — and those that will come for a while here — I don't think are going to fill the financial markets with dread or have a huge impact on the stock market at all. What they really point to is some return to normalcy," said Bob Gorman, chief portfolio strategist at TD Waterhouse.

Traditionally it's bad news for stock markets when central banks take away the punch bowl of easy money. Higher borrowing costs typically slow the economy, cut into corporate profits and increase the appeal of some competing fixed-income investments.

Most vulnerable are rate-sensitive sectors like utilities, banks and other financial institutions, as well as high dividend stocks like many found in the telecoms sector.

But analysts say this tightening cycle is less worrying for stocks, pointing out that interest rates remain low in absolute terms. The central bank cut its key rate to a record low 0.25 percent in April 2009 in an aggressive response to the financial crisis and resulting recession.

A recent Reuters poll showed the overnight rate is expected to rise to just 1.25 percent by year's end, and to 2.5 percent by the end of 2011. Even then, rates will be lower than they were in early 2008.

By comparison, the central bank raised rates 2.5 percentage points from late 2004 to mid-2007, lifting its key rate to 4.5 percent.