"This rate hike signals that the Bank of Canada is determined to bring its benchmark overnight rate back to more normal levels and that the economy is strong enough to withstand further rate increases", Sherry Cooper, chief economist at Dominion Lending Centres, wrote in a research note.
"Based on our interpretation of the bank's statement, we think that policymakers envisage a somewhat faster pace of tightening, but still think that disappointing data will persuade the governor to stand pat for some time and then, eventually, to force a reversal, with rates falling next year". Recent data suggest housing markets are beginning to stabilize following a weak start to 2018. Meanwhile, exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.
"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement.More news: Anderson stuns Federer in last 8
However, the negative blow of the trade policies recently put in place are to be largely offset by the positives for Canada from higher oil prices, which are above US$73 per barrel, and the stronger USA economy, the bank said.
The central bank's rate decision arrives as Canada faces significant trade-related uncertainties, including stalled NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the automotive sector. The interest charged on this kind of debt typically goes up when the Bank raises its rate.
As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports.More news: Rafa Benitez gives his verdict on England's World Cup hopes
The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge. This effect is now judged to be larger, given mounting trade tensions.
Poloz recently said the impacts of the U.S.More news: Liverpool-supporting Tranmere player brands Loris Karius 'f****** s***' after latest error