In a highly-expected move, the Bank of Canada has raised its benchmark rate by one-quarter of a percentage point to 0.75 per cent, while issuing a gloomier economic forecast.
It was the second straight month the central bank hiked rates as the global economy begins its slow recovery.
However, Bank of Canada governor Mark Carney scaled back expectations for Canada's GDP for the year, from 3.7 per cent growth to 3.5 per cent.
The growth rate for 2011 dipped from 3.1 to 2.9 per cent, according to the Bank of Canada's projections. It said the economy won't be all the way up to speed until the end of that year, instead of the spring as previously thought.
"This revision reflects a slightly weaker profile for global economic growth and more modest consumption in Canada," the bank said in a statement.
Housing activity has declined "markedly," and while employment growth has resumed, "business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession," the bank added.
The big commercial banks usually hike their prime rates is response to the Bank of Canada's moves, which can have an impact on variable mortgages.
BNN's Michael Kane says the central bank sees the global recovery as "proceeding but is not yet self-sustaining."
"Basically, they are saying because of uncertain economic times around the world that households are scaling back on spending, corporations are scaling back," he told CTV News Channel.
The next interest rate announcement is scheduled for Sept. 8.
