One day after raising the key interest rate by 50 basis points to 1.5 percent, the Bank of Canada warned Canadians that rates may rise above previously targeted levels.

Bank of Canada Deputy Governor Paul Beaudry said in a speech before the Gatineau Chamber of Commerce: "We have to raise interest rates to align demand with supply."

The bank had previously targeted raising the overnight key lending rate to between 2 percent and 3 percent to tame inflation, but the bank now believes rates may need to exceed previous targets.

Beaudry said: "We may need to raise the policy rate to the upper limit to balance supply and demand and maintain inflation expectations well anchored."

The neutral interest rate is the point where the bank believes rates neither stimulate nor affect economic growth. Future rate increases may help combat persistent inflation, a scenario where prices rise due to higher prices elsewhere and increased labor costs.

In this scenario, the bank believes inflation will become "self-sustaining" and continue to rise. Beaudry said: "History shows that bringing inflation down without severely hurting the economy is difficult."

Beaudry also acknowledges that external factors such as the war in Ukraine, supply chain shortages, and COVID lockdowns in China continue to play a significant role in inflation reaching its highest level in 31 years.

Additionally, the Deputy Governor admitted that inflation not only missed the bank's 2 percent target but consistently exceeded the (bank's) expectations."

Beaudry promised to analyze why the bank made errors in forecasting inflation in the upcoming update in July.