The Bank of Canada unexpectedly raised interest rates by 25 basis points to 4.75 per cent late on Wednesday, Beijing time, the highest level since 2001, and the market consensus expected it to remain unchanged after four straight months on hold.

Usd/CAD traded 60 points lower in the short term after the data.

In its statement, the Bank of Canada removed language from April that the central bank was prepared to raise interest rates further if necessary. In its interest rate statement, it said:

"Overall, excess demand in the economy appears to be more persistent than expected."

Since announcing a conditional pause in interest rate hikes in January, policymakers have warned that further increases may be necessary. While some Canadians are feeling the pinch of higher borrowing costs, the central bank's move suggests officials are concerned that economic momentum won't slow enough without another rate hike.

The Bank of Canada said "monetary policy is not sufficiently restrictive to bring supply and demand into balance or to bring inflation back to its 2 per cent objective on a sustained basis", citing evidence including stronger-than-expected first-quarter output growth, rising inflation and a rebound in housing market activity.

This comes after the Reserve Bank of Australia unexpectedly raised interest rates by 25 basis points on Tuesday. The Bank of Canada is the first and only G7 central bank to pause its rate hike cycle. Now it has changed its mind, admitting that higher borrowing costs are still needed to curb inflation even as the economy is more resilient than expected.

Bank of Canada Governor McCollum and his colleagues cited a rise in the three-month moving measure of underlying price pressures as a key reason for their action. They said there were "growing concerns that CPI could rise significantly above the 2 per cent target".

The statement did not include forward guidance, suggesting that policymakers were not yet sure whether the rate hike would end up being a fine-tuning move or the start of a new round. Officials said they plan to study the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior.

During the US regional banking crisis in March, the Bank of Canada seemed to pause interest rate hikes at the right time - they did not cause a hard landing for the Canadian economy, and inflation edged down.

But the data now suggest that this pause was premature. Canada's economy has proved more immune to rising borrowing costs than most economists expected. Many believe the huge debt load and bloated housing market are big reasons why McCollum may stop raising rates before Fed Chairman Jerome Powell and his peers.

The Bank of Canada said GDP was stronger than expected, including "broad-based" consumption growth, even taking into account record population growth. Policymakers also called Canada's labor market "tight," noting that while immigration and higher participation rates are expanding the labor supply, new workers are being hired right away, reflecting "continued strong demand for labor."