Bank of Canada 'more comfortable' after inflation pick-up

Sat Feb 22, 2014 3:39am EST
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By Louise Egan

SYDNEY (Reuters) - Two months of stronger inflation in Canada has made the central bank feel a "little more comfortable", Bank of Canada chief Stephen Poloz said on Saturday, signaling that he may feel less pressure to cut interest rates to deal with disinflation.

Poloz also told Reuters the value of the Canadian dollar will remain a challenge for manufacturers and exporters even as the U.S. economy recovers, because higher prices for commodities that Canada exports would prop up the currency.

Speaking before a meeting of finance ministers and central bank chiefs from the Group of 20 leading economies in Sydney, Australia, Poloz said data on Friday showing the inflation rate rose to a 1-1/2-year high of 1.5 percent in January from 1.2 percent in December indicated the surprisingly low prices seen in 2013 may have been just "noise".

"In your heart you're hoping that some of it is noise and that other bits of noise will offset it, and in the wash you find that the underlying inflation rate isn't falling really rapidly," Poloz said.

"So in that sense it's reassuring. It's helping us to feel a little more comfortable."

Still, Poloz said there was nothing in the data to make the central bank rethink its forecast that inflation will hover at around 1 percent in the first half of this year before returning to the 2 percent target in about two years.

Poloz, 58, took over as central bank chief last June. In October he oversaw a major policy shift because of growing worries about disinflation, saying policymakers were puzzled by the trend. The central bank abandoned 18 months of talking about eventual interest rate hikes and adopted what it called a neutral stance.

In January, Poloz said he was even more worried by disinflation and left the door open to a rate cut. Inflation has been below the central bank's target for 21 months.   Continued...

Bank of Canada Governor Stephen Poloz arrives at a news conference upon the release of the Monetary Policy Report in Ottawa January 22, 2014. REUTERS/Chris Wattie