The central bank increased its key interest rate by 25 basis points to 1.75 percent and said it would continue to hike to at least 2.5 percent to keep inflation in check, while it dropped previous references to a gradual pace of tightening.

"The Canadian dollar is reacting to the removal of gradual from the Bank of Canada statement," said Adam Button, chief currency analyst at ForexLive. "The market sees the changes in the statement as a hint that rates could rise faster."

The central bank targeted a neutral stance for interest rates, which it estimates to be between 2.5 percent and 3.5 percent.

Money markets implied a policy rate of 2.43 percent in December 2019, up from 2.37 percent before the rate announcement.

"The biggest question mark is how are households going to react to the higher rates," said Darcy Briggs, a Calgary-based portfolio manager at Franklin Bissett Investment Management.

Elevated levels of household debt could leave Canada's economy more sensitive than usual to higher interest rates. Canada's household debt-to-income ratio rose to 169.1 percent in the second quarter, near a record high.