The Bank of Canada has raised its key interest rate as expected to 0.75 per cent the central bank's first move upward in the cost of borrowing in seven years.
The bank's target for the overnight rate at which major financial institutions make one-day loans to each other moved up by one-quarter of a percentage point from 0.50 per cent.
In a statement accompanying the rate decision, the central bank said the Canadian economy has been robust, fuelled by household spending.
"As a result, a significant amount of economic slack has been absorbed," the bank said, adding that the remaining slack is expected to be gone around the end of this year, which is earlier than the bank anticipated in its April Monetary Policy Report.
The move means consumers will likely pay more for borrowing such as variable-rate mortgages and lines of credit.
In the wake of the rate hike, the Canadian dollar shot up. The loonie was trading up 1.14 cents at 78.53 cents US by Wednesday afternoon.
The interest rate increase had been widely expected after senior Bank of Canada officials signalled in speeches and interviews over the past weeks that lower rates had done their job, and the Canadian economy was performing well.
Speaking at a news conference on Wednesday in Ottawa, Bank of Canada governor Stephen Poloz acknowledged that the bank raised its key rate despite inflation currently lagging below its stated target of two per cent. Poloz said the bank considers that weakness in inflation to be temporary.
"It is worth remembering that it can take 18 to 24 months for a monetary policy action to have its full effect on inflation. This means that central banks must target future inflation by anticipating future deviations from target."
"It is about where we expect inflation to be," Poloz told reporters.
The bank is currently expecting a "modest overshoot" of the two per cent inflation target in 2019.