For the first time in a year, the Bank of Canada increased its key interest rate to 4.5 per cent in a bid to keep inflation under control and cool a hot economy.
Most analysts say another rate hike on top of Tuesday's 25-basis-point (0.25 per cent) rise is likely in September.
Beyond that, experts say it will depend whether the central bank thinks that will be enough to deflate inflationary pressures, or whether more tightening is required.
Some were optimistic about the bank's language, noting it said the risks for inflation were "roughly balanced."
"That's quite a less strident tone than signalled in late May," Douglas Porter, deputy chief economist with BMO Capital Markets, told The Canadian Press.
"While the bank is likely to hike again in September, they seem to be sending a fairly clear message that they don't foresee a sustained tightening campaign."
Other economists noted the warning that inflation may not fall to the target level of two per cent until early 2009, which could mean further hikes and the rate ultimately settling at 5.25 per cent early next year.
This has the Canadian Labour Congress worried. That group feels the bank should worry less about inflation and more about the high Canadian dollar that's helping devastate manufacturing employment in Canada.
Statistics Canada said last week that the manufacturing sector had lost more than 100,000 jobs in the past year.
Marc Levesque, chief economic strategist for TD securities, said boosting manufacturing employment is not the bank's job.
"The bank's mandate is not to stimulate manufacturing," he told CP. "Its mandate is keeping inflation in check."
The Canadian dollar closed down 0.17 cents to 95.1 cents US on Tuesday.
The dollar, which has been 11 per cent higher than the U.S dollar so far this year, is expected to climb to 96 cents by the fall.
Banks react
As expected, banks wasted little time boosting their prime rates, the interest they charge their best customers.
That will go from six per cent to 6.25 per cent.
Fixed five-year mortgages currently average about 7.24 per cent. Banks had already boosted those in anticipation of a rate hike and aren't considered likely to rise again in the short term.
Residents negotiating a mortgage and those who have variable rate loans could also see some increase in debt servicing costs.
But for the most part, Canadians should be fine with the interest rate hike, economist Patti Croft said.
"I think Canadian consumers are in great shape," she told CTV. "The unemployment rate is at its lowest level in 33 years and the net worth of Canadians is at a record high.
"We've had significant strength in stock market and in house prices."
Richard Croft, of R.N. Financial Group, said the increase could "dampen the enthusiasm" to buy houses, but he didn't expect a dramatic slowdown.
"The next hike or two will probably be the ones that would actually slow the economy to where (Bank of Canada governor David Dodge) wants it to be, if it doesn't slow on its own," Croft said.
With files from The Canadian Press
