Bank of Canada increases overnight rate to 1.25%

The Bank of Canada raised the target lending rate by a quarter percentage point overnight to 1.25%.

Governor Stephen S. Poloz said the rate hike "validates what we've seen in the market place," but when it comes to NAFTA, it's a "very big unknown for us."

The increase marks the highest rate in Canada since 2009 and it's the third increase in the last six months.

Poloz says the bank raised the rate because “inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.”

According to a senior wealth advisor in Kelowna, the Bank of Canada's rate increase can be described as an effort to ease off the economic gas pedal.

"They increased the interest rate because they do see inflation starting to become a factor," said Robert Oleksyn, senior wealth advisor for Valley First. "It's sort of taking your foot off the gas of a car when you try to slow it down a little."

The market has grown at a faster rate than predicted, but at the same time, NAFTA is hurting export businesses.

"Everyone is working and feeling confident and buying things, and the economy is going nicely, so they are trying to reduce some stimulus they have previously put in there," said Oleksyn.

This rate will make it more expensive to buy and borrow for things like car loans and mortgages.

Watch the full press conference here:

As the Canadian dollar rises, trade exports become more expensive for foreign buyers and those buyers may look elsewhere for cheaper options.

Oleksyn suspects the Bank of Canada will hold steady at the next scheduled key rate setting, which is March 7, 2018.

"If everything is staying the same, they will keep it where it's at or trending higher, but they always have to be aware of the economy and what they have to do to stimulate it if they need to," he said.

The Bank of Canada predicts the Canadian economy to slow from 3% in 2017 to 2.2% this year and 1.6% in 2019.

Its goal is to get as close to the target 2% inflation rate as possible in order to achieve the predicted equilibrium between economic growth and an increased cost of living.