The Bank of Canada has raised its benchmark interest rate for the first time since January, to 1.5 percent

Ottawa (AFP) - The Bank of Canada on Wednesday hiked its benchmark interest rate to 1.5 percent, the first increase since mid-January, as the Group of Seven economy tries to tame inflation.

The interest rate increase of 25 basis points – which was expected by analysts – put the rate at its highest point in a decade, and the bank said future hikes were expected.

“The economy seems to be on track,” central bank governor Stephen Poloz told reporters.

“We are operating near capacity, companies are investing even if some are hesitating, the labor market has been strong, and, most importantly, inflation is on target.”

Inflation “is expected to edge up further to about 2.5 percent before settling back to 2 percent by the second half of 2019,” the bank said in a statement.

“Higher interest rates will be warranted to keep inflation near target,” it said, adding that it would “continue to take a gradual approach, guided by incoming data.”

The central bank however said the impact of global trade uncertainty on Canadian exports and investment had grown, in the face of both an intensifying tariff war between the US and its partners, and the unknown future of NAFTA.

“The possibility of more trade protectionism is the most important threat to global prospects,” the bank said.

Poloz added: “Uncertainty around the future of the North American Free Trade Agreement has caused some companies to delay investment spending or to move their investments to the United States.”

Talks to revamp the trilateral NAFTA deadlocked in February after more than six months, as Ottawa and Mexico flatly rejected Washington’s calls for a five-year sunset clause on the agreement as well as steep new US-content requirements for autos.

The United States is Canada’s main trading partner and its main market for exports.

But the bank insisted the “estimated impact” of US tariffs on Canadian steel and aluminum, along with Canadian countermeasures, on the country’s growth would be “modest.”

“Overall, the bank still expects average growth of close to 2 percent over 2018-2020,” it said.

The next rate decision is due on September 5.