The Bank of Canada hiked its key overnight interest rate by one-quarter point to 4 percent as expected on Tuesday and signaled more hikes may be on the way as the economy might now be growing beyond capacity.

But the bank, which has now raised rates six consecutive times, also issued a cautionary note that it would monitor developments closely "in light of the cumulative increase in the policy interest rate since last September."

The central bank said: "In line with the Bank's outlook for the Canadian economy, some modest further increase in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target over the medium term."

Using slightly more bullish language than before, it said the economy was now "operating at, or just above, its production capacity," whereas in March it had only said it was at capacity.

And it saw less of a risk in the future from an unwinding of global imbalances. "The bank judges that the risks to its projection are roughly balanced, with a small tilt to the downside later in the (2006-08) projection period."

Previously it had spoken of balanced risks for 2006 and risks being tilted to the downside from 2007 onwards.

The bank said the global economy had been showing a little more momentum than anticipated and Canada had been growing at a solid pace consistent with the bank's January outlook despite continuing challenges to a number of sectors from global competition and past appreciation of the Canadian dollar.

The bank did upgrade its forecast for 2007 growth to 3.0 percent from 2.9 percent and issued its first 2008 forecast of 2.9 percent. It pegged this year's growth at 3.1 percent.

It projected total inflation averaging close to its 2 percent target in 2007 and 2008. It said this would exclude any effect from the new Conservative government's plans to cut the federal sales tax.