Canada’s benchmark stock index pared some of its losses but still closed in negative territory in the wake of the Bank of Canada historic full-point interest rate hike Wednesday.

The S&P/TSX Composite Index dropped as much as 1.6 per cent immediately after the Bank of Canada surprised economists with its largest rate increase since 1998. Economists widely expected a three-quarter-point hike.

After a mild rebound, the index closed 63.45 points lower, or 0.34 per cent, at 18,615.19. The financial subsector was the worst performer. While higher interest rates can boost banks’ net interest income, those higher rates can also trigger worries about a recession and loan losses.

In a news conference, Governor Tiff Macklem said “the best way to protect people from high inflation is to eliminate it” and he stressed that the central bank is committed to getting “price changes back to normal.”

"An increase of this magnitude in one meeting is very unusual. It reflects very unusual economic circumstances,” Macklem said.

“Inflation is nearly eight per cent, a level not seen in nearly 40 years.”

The Canadian dollar rose to 77.10 cents U.S. as traders bought the loonie following the Bank of Canada hike.

Markets in New York ultimately ended lower Wednesday as investors weighed the implications of the latest U.S. inflation figures. The S&P 500 closed down 0.45 per cent, the Dow Jones Industrial Average fell 0.67 per cent and the tech-heavy Nasdaq was closed 0.15 per cent lower after spending much of the day in the green.

U.S. inflation rose 9.1 per cent from a year earlier in June, which was more than economists projected. This marked the fourth-straight month that consumer price index annual data topped estimates.

GETTING AHEAD OF THE U.S. FED

Kathy Lien, managing director at BKForex, said the Bank of Canada’s rate hike was done to frontload interest rate increases in response to the U.S. Fed’s policy moves.

“I think there is no question that the Bank of Canada wants to get ahead of the Fed,” Lien said.

“They are looking at the U.S. inflation numbers that came out this morning, they're looking at their own levels of inflation and they're realizing that the Fed needs to be very aggressive and that's going to strengthen the U.S. dollar.”

But some economists think investors should be prepared for even more significant rate increases.

“We think there's going to be another two percentage point hikes next year - up to six per cent,” said Earl Davis, head of fixed income and money markets at BMO Global Asset Management, in an interview Wednesday.

“In all central banking hiking policies, they always have to go higher than inflation. So let’s assume inflation drops to five per cent - we believe they have to go higher than that to break the back of inflation."

Benchmark West Texas Intermediate settled US$0.46 higher at US$96.30 per barrel in a choppy trading session.