The Bank of Canada has today raised interest rates as expected, and said further gradual rate hikes would be warranted.
But it warned that mounting trade tensions would have a larger impact on investment and exports than previously thought.
The overnight interest rate was hiked by a quarter point to 1.5%, the fourth increase since the bank began raising borrowing costs in July last year.
It comes as Canada grapples with rising inflation pressures and job growth, and amid huge risks posed by a trade war with the US.
Canada's central bank said the tit-for-tat tariffs by the two countries would cause some difficult adjustments for industries and workers, but that the impact of the tariffs on growth and inflation was expected to be modest.
The bank tweaked its standard language on future rate hikes, saying that while it would take a gradual approach guided by data, it was monitoring the economy's adjustment to higher rates, the evolution of capacity and wage pressures as well as "the response of companies and consumers to trade actions."
Pointing to a stronger-than-expected US economy, the bank boosted its estimate of Canadian second-quarter growth to 2.8% from 2.5% forecast in April.
But it said that growth would slow to 1.5% in the third quarter.
Inflation in Canada was expected to pick up to about 2.5% before settling back to 2% by the second half of 2019, the bank said.
Wage growth was running at about 2.3%, which the bank said was "slower than would be expected in a labour market with no slack."
While temporary factors were causing volatility in quarterly growth rates, the bank said it expected the economy to expand by about 2% on average over the next two years.
Exports were being buoyed by strong global demand and higher commodity prices, it noted.
"Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors," the bank said in a statement accompanying the rate decision.
Expectations for further rate hikes by the Fed have boosted the US dollar, and oil prices have risen, the bank noted.
"Yet the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions," it said.
While household spending was being dampened by higher borrowing costs and tighter mortgage rules, recent data suggests housing markets are beginning to stabilise after a weak start to the year, the bank said.
