'There are worries ahead': Experts react to Bank of Canada's rate hike

The Bank of Canada raised its benchmark interest rate by a quarter percentage point to 1.5 per cent Wednesday, even as the economy faces fallout from widening trade uncertainty.

The July projection also incorporates the estimated impact of tariffs on steel and aluminum recently imposed by the United States, as well as the countermeasures enacted by Canada. It was the bank's fourth increase over the last 12 months and the first time the rate has been this high since December 2008.

However, the central bank said it would take a gradual approach to future rate increases amid mounting tensions over trade with the USA, among other uncertainties.

The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent. In particular, the Bank is monitoring the economy's adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.

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The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.

"I thought this was about as neutral a statement as you possibly can put into the marketplace given that you have hiked rates.We're pretty much in uncharted territory in the sense of we've never been this indebted, rates have never really been this low, and [Poloz] is trying to reverse the ship without turning the ship over".

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.

The country's inflation rate is expected to rise as high as 2.5% - above the 2% mid-point of the bank's target range - due to temporary factors such as higher gasoline prices. CPI inflation is expected to edge up further to about 2.5 per cent before settling back to 2 per cent by the second half of 2019.

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