Above-target inflation puts rate pressure on Bank of Canada

Fri Sep 19, 2014 10:26am EDT
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By David Ljunggren

OTTAWA (Reuters) - Canada's annual inflation rate remained above the Bank of Canada's 2.0 percent target in August for the fourth month in a row, putting pressure on the central bank to drop its neutral stance on interest rates.

Statistics Canada said on Friday overall inflation held firm at 2.1 percent while the closely watched core rate unexpectedly jumped to 2.1 percent from 1.7 percent in July to hit a level last seen in April 2012.

The Bank of Canada, citing a below-par economy, says the next interest rate move could either be a hike or a cut, but analysts said the new data called this into doubt. Central banks generally raise rates to cool inflation.

"With inflation on both headline and core now about 2 percent, there is a limit to how long the Bank of Canada can continue to maintain its current tone," said Camilla Sutton, chief currency strategist at Scotiabank.

The Bank of Canada is taking a relaxed attitude to the overall inflation rate, which peaked at a 28-month high of 2.4 percent in June, and forecasts it will drop below 2 percent in the first half of 2015.

The central bank said earlier this month that recent data reinforced its view that higher inflation had been attributable to temporary effects.

Statscan said the driver for the year-on-year increase in overall prices was higher shelter costs. The spike in core inflation was fueled by higher telephone and transportation costs.

"Given the broad nature of the gains, it might be tough for the bank to argue the increases are transitory, and a continued upward trend will be difficult to overlook," said Benjamin Reitzes, senior economist at BMO Capital Markets.   Continued...

Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007.  REUTERS/Christinne Muschi