OTTAWA — The Bank of Canada raised its key interest rate another quarter of a percentage point Wednesday morning. After a year of rapid increases meant to fight inflation, the central bank said its governing council members think they’re done with increases for a while. Here’s what you need to know.

The big picture: In a new assessment of the Canadian and global economies, the central bank stands by the broad strokes of its previous forecasts in October. It still expects Canadian economic growth to stall through the middle of this year, then pick up to about two per cent in 2024. It expects consumer price inflation to decline to about three per cent by mid-2023, and to the bank’s target of two per cent in 2024.

“We know it takes time for higher interest rates to work through the economy to slow demand and reduce inflation,” the central bank’s governor, Tiff Macklem, said in a news conference. “Given the speed and magnitude of the interest rate increases over the last year, their full effect is still to come.”

The 2023 stall won’t feel good, he added. But the economy needs to find a new balance and see supply catch up with the recent excess demand.

The economy is stronger than expected: The central bank’s views on the economies of the United States, Europe and China have all improved since it last published an analysis in October, when it revised those down markedly. That’s good in a lot of ways but potentially bad for inflation, which is when too much money is chasing too few goods, driving prices up unproductively. The labour market in Canada “has been more resilient than expected,” which is good for workers but pushes wages up, and that tends to be inflationary, too.

Core inflation is stubborn, and so are expectations: The headline numbers for consumer prices have improved and are headed in the right direction, but Canadians are still seeing “persistent price increases for food and shelter.” Surveys by the bank have found that consumers and businesses “still expect that, over the next two years, [consumer price] inflation will be well above two per cent and higher than the bank’s inflation forecast.” Expectations of high inflation can lead workers to demand higher pay and businesses to raise prices, which leads to actual high inflation, which the Bank of Canada wants to stop.

“Simply put, our overheated economy did not cool as much as we expected,” Macklem said.

Therefore: Today’s hike, which brings the central bank’s “policy interest rate” to 4.5 per cent. “With persistent excess demand putting continued upward pressure on many prices [the] governing council decided to increase the policy interest rate by a further 25 basis points,” it said, making borrowing and spending more expensive still.

It’s also continuing with “quantitative tightening,” eliminating cash it put into the economy to keep things liquid during the depths of the COVID-19 pandemic.

Looking forward, the bank “expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”

This is, Macklem said, a “conditional pause.” If inflation stays high, the bank will hike interest rates further.

Looking forward, the bank “expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”

The risks: The central bank said persistent labour shortages could push wages higher for longer, driving more rapid inflation than it expects. China’s abrupt abandonment of its harsh anti-COVID restrictions has boosted economic activity there but could make Chinese industry hungrier for commodities and energy, driving up those prices. General geopolitical tension could snarl supply chains again, driving prices up. Or, in the other direction, a severe global economic slowdown—particularly if other central banks clamp down too hard on inflation in their currencies—could slow the Canadian economy, too, making the Bank of Canada’s interest rate too restrictive.

Macklem said the bank is more concerned about the risks of higher-than-projected inflation than about those of interest rates that go too high.

What’s next: The Bank of Canada is next due to update its interest rate on March 8.