The Bank of Canada has hiked its benchmark interest rate to 0.75 per cent from 0.5 per cent, its first increase in nearly seven years, amid expectations of stronger economic growth this year.
Such a move is bound to increase the costs of mortgages, home equity lines of credit and other loans linked to the big bank prime rates.
The Bank of Canada cut interest rates by a quarter of a percentage point twice in 2015 to help the economy deal with a plunge in oil prices, but it said Wednesday that adjustment has been made.
"The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential," the bank said in a statement.
"Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding."
In its outlook for the Canadian economy, the Bank of Canada estimated growth to be 2.8 per cent this year, 2.0 per cent next year and 1.6 per cent in 2019. That compared with its April forecast for growth of 2.6 per cent this year, 1.9 per cent next year and 1.8 per cent in 2019.
The rate increase, the first since September 2010, was widely expected by economists following "hawkish" comments by Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins in recent weeks.
The hike comes as inflation remains below the bank's two per cent target, however it said it believes the recent softness is temporary, with the effects of food price competition, electricity rebates in Ontario and changes in automobile pricing expected to fade. The bank expects inflation to ease further this year due in part to Ontario electricity rebates, but return to close to two per cent by the middle of next year.
The Bank of Canada said it also anticipates exports to pick up in the coming quarters and make an increasing contribution to growth, while business investment is also expected to rise.
Consumer spending is expected to continue to be a significant contributor to the economy, but the bank said it believes high levels of household debt and a slowdown in the housing market will weigh on spending.
The announcement follows signs that the housing market, a key economic driver in recent years, is adapting to government changes meant to cool the real estate sectors of Toronto and Vancouver and help improve financial stability.
"Looking ahead, residential investment is anticipated to contribute less to overall growth," the bank said. "Macroprudential and housing policy measures, as well as higher longer-term borrowing costs resulting from the projected gradual rise in global long-term yields, are all expected to weigh on housing expenditures."
The Bank of Canada's next scheduled rate announcement is set for Sept. 6.
