Source: The Canadian Press

The Bank of Canada raised the trend-setting interest rate a quarter point to 1% on Wednesday, even as it acknowledged that the country’s economic growth will be more gradual than previously thought.

It’s the third hike in three months, taking the overnight rate up in stages from the rock-bottom 0.25% that was set by the central bank during the recession to help stimulate the economy.

The hike, which most economists had predicted and supported, will likely have the effect of increasing borrowing costs on short-term loans, such as variable mortgages and lines of credit.

But analysts were also looking for acknowledgment from governor Mark Carney that the recovery has taken a few surprise body blows of late and that he will now pause for the next few months until the picture clears.

Instead, the bank’s governing council appeared content to stick to its previously optimistic outlook and gave no hint about plans for future decisions, saying that will depend on the “unusual uncertainty” of the outlook.

As for the economy, the council remained upbeat, downplaying its overly optimistic April and July forecasts.

“Economic activity in Canada was slightly softer in the second quarter than the bank had expected, although consumption and investment have evolved largely as anticipated,” the council writes.

“Going forward, consumption growth is expected to remain solid and business investment to rise strongly.”

In July, the bank downgraded its previous call for a 3.8% advance in the second quarter – the April-June period – to 3%.

But in fact, both were wildly off. Statistics Canada reported last week the period only produced a 2% increase in output, about one-third the pace of growth seen in the first three months of the year.

The bank conceded that the growth profile for the economy going forward will be “slightly more gradual” than it had thought and that since proceeding to withdraw monetary stimulus in April “financial conditions in Canada have tightened modestly.”

Even so, with a 1% policy rate the cost of borrowing in Canada remains “exceptionally stimulative,” the bank said.

It blamed weakness in the U.S. economy, which is being held back by the high levels of unemployment, for the slowdown in Canada. Canada’s recovery has outpaced most, if not all, of the G7 leading economies, particularly the U.S., which continues to shed net jobs while Canada has recouped almost all of those lost during the 2008-2009 recession.

The bank said its policy rate is consistent with reaching a 2% inflation target in the medium term.

But economists question how much further Carney can go with the U.S., Canada’s largest trading partner, contemplating more stimulus.