The Bank of Canada will continue to raise interest rates gradually, Governor Stephen Poloz said, stressing that despite economic uncertainties, the bank did not want to let inflation momentum build.

The central bank has raised rates four times since July 2017 and most market players expect another hike on October 24. Poloz said that while the bank did not know exactly where the economy was heading, that did not justify inaction.

Market expectations of an interest rate hike in October, as reflected in the overnight index swaps market, rose slightly to 76.46% from 72.36% before the speech.

Although the annual inflation rate in August was 2.8% well above the bank's 2.0% target, Poloz said that was partly due to the boost provided by temporary factors such as higher gas prices.

"We know that if we move too slowly to raise interest rates, the economy could move firmly above its capacity limits and inflation could establish significant momentum. We certainly want to avoid this outcome," he said.

That said, new digital technologies could be giving the economy more room to grow before inflation pressure emerged.

"Raising interest rates too quickly could choke off this economic growth unnecessarily," Poloz continued.

The bank left rates unchanged on September 5 and Poloz said policy makers had pondered at the time whether the gradual approach to raising rates was still appropriate, given that its economic forecasts were on target.

The bank discussed whether the data coming in as planned "was a reason for more moving more quickly ... and our conclusion was no, we still have a number of uncertainties we are carrying," he told a news conference after the speech.

One important unknown was the fate of talks to renegotiate NAFTA. Poloz said that if the North American Free Trade Agreement were successfully renewed, investment spending should pick up, and that would "give us a longer period of non-inflationary growth."

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