Policymakers led by Governor Tiff Macklem increased the central bank’s overnight benchmark to 1% on Wednesday. Macklem said he expects rates will return to what they consider the “neutral range” of 2% and 3%, with policy makers prepared to move “forcefully” if needed. 

The bank also said it will stop purchasing government bonds later this month to start shrinking its balance sheet, another form of stimulus withdrawal.

“The economy can handle higher interest rates, and they are needed,” Macklem said at a news conference in Ottawa. 

Short-term bonds fell after the report, pushing Canada’s benchmark two-year yield to as high as 2.346%, before reversing those losses. The loonie strengthened, however, gaining 0.4% to C$1.2593 per U.S. dollar at 12:29 p.m. in Toronto trading. 

Eoin Treacy's view

About a quarter of Canadian mortgages are floating rate. Rising government bond yields and the promise of aggressive rate hikes already bit into housing demand. Getting inflation back under control should be less worrisome for a major commodity exporter like Canada but it isn’t something that can be ignored either.
 
The Canadian Dollar continues to firm at the upper side of a seven-year base formation. A sustained move below 78¢ would be required to question medium-term scope for additional upside.
The S&P/TSX has been quite inert since hitting a new all-time high in late March. The commodity/energy sector remains firm but is being weighed down by financials.

The Financial sector has not been immune from weakness in the wider global sector and is back testing the trend mean. It will need to bounce soon to avoid top scope for a much deeper more volatile setback.