The Canadian dollar slumped against its currency rivals in the middle of the trading week after the Bank of Canada (BoC) raised interest rates to their highest levels in more than 15 years. With the federal government warning that the national economy is poised for “turbulent” times this year, will consistent restrictive policy weigh on the country?

The Canadian central bank raised interest rates by 25 basis points, lifting the benchmark policy rate to 4.5%. This is the highest interest rates have been since the end of 2007.

Officials also agreed to increase the bank rate to 4.75% and the deposit rate to 4.5%. They also reiterated their quantitative tightening policy of trimming the balance sheet.

BoC estimates suggest that the national economy expanded by 3.6% in 2022. Policymakers anticipate the Canadian economy will rise by 1% this year and 2% in 2024.

“In Canada, recent economic growth has been stronger than expected and the economy remains in excess demand. Labour markets are still tight: the unemployment rate is near historic lows and businesses are reporting ongoing difficulty finding workers, the central bank wrote in a statement. “However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.”

The Governing Council suggested that it will continue raising rates moving forward to return to the policy rate of 2%.

Policymakers will be scheduled to meet again on March 8.

Before the interest rate decision, manufacturing sales tumbled 1.8% in December, according to Statistics Canada.

On Thursday, the Canadian Federation of Independent Business (CFIB) Business Barometer will be released, as well as average weekly earnings and wholesale sales.

The Canadian bond market was mostly in the red, as the benchmark ten-year yield fell 6.5 basis points to 2.792%. The one-month bill shed five basis points to 4.27%, while the 30-year bond dropped four basis points to 2.936%.

The USD/CAD currency pair rose 0.09% to 1.3383, from an opening of 1.3371, at 14:06 GMT on Wednesday. The EUR/CAD surged 0.46% to 1.4625, from an opening of 1.4558.