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 per cent 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 plunged, sending the Canada two-year yield to 4.571 per cent at 10:23 a.m. — the highest since August 2007. The loonie jumped to $1.3347 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 are worried that economic momentum won’t slow enough without another hike.

“Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2 per cent 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 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.

Macklem 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 per cent target,” they said.

The statement was light on forward-looking commentary, suggesting policymakers aren’t yet sure whether the move will end up as a fine tuning or the start of another series of increases. Officials said they plan to examine how excess demand, inflation expectations, wage growth and corporate pricing behavior evolve.

Although specific guidance around being prepared to increase borrowing costs again wasn’t in the statement, 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. 

During the U.S. 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. 

The financial turmoil led many to expect that the Federal Reserve wouldn’t hike much further, reducing concerns about rate divergence and imported inflation, given the U.S. is by far the northern nation’s top trading partner.

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 gross domestic product, including “broad-based” consumption gains even after accounting for record population growth. Policymakers also called Canada’s labour 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 labour.”

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