The Bank of Canada’s decision to resume raising interest rates shook global bond markets and underscored the difficult task faced by central banks as they try to slow economic activity and tamp down inflation.

Policymakers led by Governor Tiff Macklem increased the benchmark overnight rate to 4.75 per cent, ending a pause they declared in January after Canada’s economy proved surprisingly strong despite much higher borrowing costs.

The central bank said the economy is running too hot to bring inflation back to its 2 per cent target, citing robust consumer demand for goods and services and a pickup in housing activity. But Canada’s situation isn’t unique — and it may be the case that other central banks, including the Federal Reserve, will have to push rates deeper into restrictive territory this time around.

 “Usually what happens in Canada, nobody in the U.S. cares,” Fidelity Investments portfolio manager David Wolf, a former adviser to the Bank of Canada, said on BNN Bloomberg Television. “But in this case, I think people are taking the message that maybe all of these central banks aren’t as close to done as people would have thought.”

The yield on 2-year U.S. Treasuries jumped as high 4.6 per cent, while comparable Canadian government bonds now boast the highest yield since 2007. Traders briefly fully priced in a Fed hike by July.

The Bank of Canada’s decision didn’t include much forward-looking language, suggesting officials have jumped back into hiking mode without any certainty about where borrowing costs will ultimately end up. 

And while some economists have given Macklem kudos for a quick restart, the rate move is also a tacit acknowledgment that policymakers paused prematurely. Rates are likely headed higher in Canada than previously thought necessary by most observers — and by the bank itself.

It’s a vindication for economists such as Citigroup Inc.’s Veronica Clark, the first analyst in a Bloomberg survey to predict a rate hike this week. “The Bank of Canada did pause. They waited to see how the data were coming in. They were expecting activity and inflation to slow and it didn’t,” she said Wednesday by phone. 

But by moving to the sidelines, the central bank also helped Canada’s housing market find a floor and start to rebound, she said. “It’s a bit of a cautionary tale for the Fed to be pausing too.” 

Other analysts see lessons for investors as they gauge what a potential pause in the U.S. tightening cycle might mean. Fed Chair Jerome Powell and his officials, who are now in a blackout period ahead of next week’s decision, seem intent on skipping a rate increase, while explaining to the public that they’re not done yet. 

“We have seen two central bank surprises this week in Australia and Canada. Canaries in the coal mine?” Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said by email. “The U.S. market is coming to the realization that the Fed may surprise as well.”