May 18, 2012 / 12:12 PM / in 5 years

Canadian inflation likely to stay muted in April

OTTAWA (Reuters) - Canadian consumer prices likely remained subdued in April, leaving the annual inflation rate unchanged from March when it dropped to an 18-month low of 1.9 percent, and suggesting price pressures are the least of the Bank of Canada’s worries.

Consumers felt the pinch of rising gasoline prices in April - the single biggest driver of the consumer price index - which rose by just over 3 percent in the month, according to analysts’ estimates.

But that represents a moderation from April 2011, making the year-over-year inflation rate look softer.

The core inflation rate, which excludes gasoline and other volatile items, is also expected to hold at 1.9 percent.

The numbers are not expected to play a decisive role in the Bank of Canada’s judgment on how soon to raise interest rates from their ultra-low 1.0 percent, with domestic growth and the global environment seen weighing more heavily.

The central bank targets 2 percent annual inflation. The average 2.3 percent rate in the first quarter was a notch lower than its April projection and well below the average 2.9 percent seen in 2011. The bank sees second-quarter inflation averaging 2.0 percent.

“The bank is expecting inflation to hang at around 2 percent anyways. Barring major upside surprises in inflation, it’s unlikely to affect the policy of the Bank of Canada,” said Mazen Issa, macro strategist at TD Securities.

The bank adopted a more hawkish tone in mid-April, noting that inflation and growth were both firmer than it had anticipated, raising market expectations it could raise its key overnight target either late this year or in early 2013.

Since then, there has been some disappointing data in the United States, the predominant market for Canadian exports, and renewed uncertainty about the euro zone sovereign debt problems following elections in Greece and France.

At the same time, domestic data on jobs, housing and trade suggest the economy is getting closer to its growth potential, the point at which central banks usually prefer monetary policy to be neutral rather than stimulative to keep inflation in check.

In fact, after a second straight month of surprisingly strong jobs growth, markets began pricing in a quarter-point rate hike by December of this year.

To muddy matters further, Bank of Canada Governor Mark Carney reminded market players in an op-ed in the Financial Times on Friday that “inflation can be allowed to run below target for a longer period than usual if tighter policy is warranted.”

Carney was not referring to Canada specifically, but this “flexible” inflation targeting approach suggests temperate inflation may mean little for monetary policy right now.

“Mr. Carney’s article .. indicated that in some circumstances they’ll basically close their eyes to what inflation is doing right now, ” said Doug Porter, deputy chief economist at BMO Capital Markets.

Editing by Jeffrey Hodgson

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