From the Monetary Policy Report, released today (summary here):

Canada’s economic growth in the first half of the year was somewhat stronger than had been expected. Overall, the economy now appears to be operating at full production capacity…

The base case … assum[es] energy prices consistent with current futures prices; a smooth and orderly resolution of global imbalances over the medium term, involving a modest and gradual further real effective depreciation of the U.S. dollar; and a relatively stable Canada-U.S. exchange rate over the policy horizon…

The Bank’s base-case outlook for output and inflation is subject to a number of risks and uncertainties. Over the next four to six quarters, these risks include the adjustment of the Canadian economy to global developments, uncertainty about the current level and future growth of potential output, and the evolution of energy prices. These short-term risks appear to be balanced. But as we look further out to 2007 and beyond, there are increasing risks that the unwinding of global economic imbalances could involve a period of weak global growth.

The Bank raised its key policy interest rate by 25 basis points on 7 September and again on 18 October, bringing it to 3 per cent …

In line with the Bank’s outlook, and given that the Canadian economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target. However, with risks to the global outlook tilted to the downside as we look to 2007 and beyond, the Bank will monitor international developments particularly closely.

As will we all. But until those risks start to manifest themselves, the Bank will continue raising interest rates to more neutral levels.