The Bank of Canada announced Wednesday it was raising the benchmark interest rate from l.25 percent to 1.5 percent, partly due to rising trade tensions with the US.
The US has been pressuring Canada and Mexico for more favorable trade terms in the renegotiation of the North American Free Trade Agreement.
Washington earlier this year slapped a 25 percent tariff on steel imports and 10 percent tariff on aluminum imports, with Canada among the major targets. It also threatened to impose higher duties on the automotive sector.
The bank acknowledged that the hit to the Canadian economy from the mounting trade turmoil is likely to be greater than it had anticipated in earlier forecasts.
"The possibility of more trade protectionism is the most important threat to global prospects," it said.
The central bank expects the global economy to grow by about 3.75 percent in 2018 and 3.5 percent in 2019.
It said higher interest rates will be warranted to keep inflation near target and it will continue to take a gradual approach, guided by incoming data.
The rate increase was in line with market expectations, as a recent slate of numbers from Statistics Canada suggest the economy is expanding, the job market doing well, and inflation inching higher.
The Canadian central bank has raised the interest rate four times since summer.