(Bloomberg) -- The Bank of Canada defied expectations by restarting its interest-rate tightening campaign, saying the economy is running too hot.

Policymakers led by Governor Tiff Macklem raised the overnight lending rate to 4.75% on Wednesday, the highest since 2001. The move was expected by only about one in five economists in a Bloomberg survey, and markets had put the odds at about a coin flip.

“Overall, excess demand in the economy looks to be more persistent than anticipated,” the bank said in its rate statement, which wasn’t accompanied by a new set of forecasts. Bonds fell sharply, sending the Canada two-year yield to 4.584% at 11:20 a.m. — up about 20 basis points and the highest since August 2007. The loonie jumped to C$1.3353 per US dollar.

Since declaring a conditional pause in January, policymakers have warned that further rate increases may be necessary. And while some Canadians are feeling the pinch of steeper borrowing costs, the bank’s move from the sidelines suggests officials were worried that economic momentum wouldn’t slow enough to cool price pressures.

“Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,” the bank said, citing an “accumulation of evidence” that includes stronger-than-expected first quarter output growth, an uptick in inflation and a rebound in housing-market activity.

The move will raise questions about whether the central bank has come off the sidelines to deliver a single insurance hike, or whether this is a start of another round of tightening.

Wednesday’s statement was light on forward-looking commentary. Officials said they plan to examine how excess demand, inflation expectations, wage growth and corporate pricing behavior evolve.

It’s “possible that we could see a follow up hike if signs of economic slack opening up aren’t clear in forthcoming data,” Katherine Judge, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. 

Before policymakers convene for their next decision on July 12, they will have seen two more monthly batches of jobs data, another inflation reading, April gross domestic product and an estimate for May output, plus the central bank’s surveys of consumer and business expectations.

“The onus is clearly on that data to soften broadly to preclude another rate hike, and timing a slowdown has been challenging,” Royal Bank of Canada Senior Economist Josh Nye said in a report. 

Traders in overnight swaps markets upped their bets for further tightening after the release. Another 25 basis-point hike is now fully priced by the time of the bank’s September meeting.

Macklem’s increase follows a surprise 25 basis-point boost Tuesday by the Reserve Bank of Australia. The Bank of Canada was the first and only Group of Seven central bank to pause its hiking cycle. Now it’s changed its mind, conceding that higher borrowing costs are still required to bring inflation to heel in an economy that’s proving more resilient than anticipated.

The governor and his officials pointed to elevated three-month moving measures of underlying price pressures as a key reason for their move. “Concerns have increased that CPI inflation could get stuck materially above the 2% target,” they said.

During the US regional bank crisis in March, it looked as though Macklem and his officials had hit pause at the right time — they had brought Canada’s economy to a terminal point without a hard landing scenario, and inflation was falling.

Now the data suggest that pause was premature. Canada’s economy has proved to be surprisingly more immune to higher borrowing costs than most economists expected. Many saw massive debt loads and a bloated housing market as big reasons why Macklem could stop raising rates ahead of Fed Chair Jerome Powell and other peers.

The Bank of Canada flagged stronger-than-expected GDP in the first quarter, including “broad-based” consumption gains even after accounting for record population growth. Policymakers also called Canada’s labor market “tight,” noting that while immigration and higher participation rates are expanding the supply of workers, new employees are being hired immediately, which reflects “continued strong demand for labor.”

On Thursday, Deputy Governor Paul Beaudry will provide a more thorough explanation of the bank’s decision in a speech in Victoria, British Columbia, followed by a news conference.

--With assistance from Derek Decloet.

(Updates with more economist economist reaction, plus swap-market trading.)

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