UPDATE 2-Bank of Canada eyes low inflation; sees China risk up

Thu Jun 12, 2014 1:56pm EDT
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(Adds economist and governor comments, details on inflation)

By Alastair Sharp and Randall Palmer

OTTAWA, June 12 (Reuters) - Canada's financial system is robust despite lingering concern about a stretched housing market and low inflation, while external risks from China have increased, the Bank of Canada said on Thursday.

The bank's governor expressed persisting anxiety over low inflation, citing underlying price rises of around 1.2 percent, below the 2 percent registered in April for overall inflation.

"After weighing the risks to financial stability through our improved framework and applying judgment, our level of comfort - or perhaps should I say our level of discomfort - as policy-makers remains similar to what it was six months ago," Governor Stephen Poloz told a news conference.

Canada's central bank has walked a tightrope in recent months, seemingly happy to let dovish implications devalue the domestic currency in light of low inflation but wary of further inflating a frothy housing market.

Poloz said one-off factors including an unseasonably cold start to the year had pushed core inflation higher, and newly minted Senior Deputy Governor Carolyn Wilkins added that the bank was trying to look past such factors in setting policy.

"The bank will soon enter a communications challenge with core inflation momentum ratcheting higher," Mazen Issa, a senior strategist with TD Securities, wrote clients.

While overall inflation hit the central bank's long-term 2 percent in April, core inflation was at 1.4 percent and Poloz pegged underlying inflation even lower, around 1.2 percent. This figure excluded effects from the exchange rates.   Continued...