The Bank of Canada raised its key interest rate Wednesday by 25 basis points to 4.5 per cent.

It is the eighth consecutive increase as the central bank tries to grapple with high inflation.

However, Governor Tiff Macklem suggested hikes could be done for now if projections hold steady.

“If economic developments evolve broadly in line with the forecast we published today, we expect to hold the policy rate at its current level while we assess the impact of the cumulative 425-basis-point increase in our policy rate,” Macklem told reporters.

“We have raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the two per cent target.”

Macklem said higher interest rates are working to help the economy rebalance, pointing to a moderation in household spending as an example.

But Canada’s economy remains overheated and “clearly in excess demand,” he said, with economic growth and employment being stronger than expected in the second half of 2022.

“Tight labour markets have only shown modest signs of easing,” said Macklem. “Job vacancies have come down a little but remain elevated, the unemployment rate is near historic lows, and many businesses continue to report labour shortages.”

The central bank expects growth in Canada to stall through the middle of this year before picking up later in the year.

On the other hand, said Macklem, global supply chains are resolving more quickly than expected and inflation is continuing to fall.

Inflation has declined from 8.1 per cent in June to 6.3 per cent in December, which the bank said reflects lower gasoline prices and, more recently, moderating prices for durable goods.

While short-term inflation expectations remain elevated, the Bank of Canada said three-month measures of core inflation have come down, suggesting that core inflation has peaked.

Macklem said lower energy prices, improved global supply chains and slowing demand should bring inflation down “significantly” this year.

The Bank of Canada is projecting that inflation will drop to around three per cent in the middle of 2023 and back to its two per cent target in 2024.

However, he said, there are risks around this projection, such as a potential increase in global energy prices in the near term that could push up inflation globally.

Macklem said they are also concerned the inflation drop could be lower than forecast if inflation expectations remain elected or increases in labour costs persist.

“Overall, we view the risks around our inflation forecast as balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks,” he said.

“If these upside risks materialize, we are prepared to raise interest rates further.”