WRAPUP 2-Bank of Canada under pressure as inflation at 27-month high

Fri Jun 20, 2014 2:23pm EDT
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* Overall inflation 2.3 pct in May, core 1.7 pct

* Economists expect less BoC talk about weak inflation

* Rate hike seen sooner than later - but not now

* C$ rises to five-month high, bonds sharply lower (Recasts with analyst comment, context about pressure on central bank, market reaction)

By Randall Palmer

OTTAWA, June 20 (Reuters) - The Bank of Canada came under pressure on Friday to stop fretting about low inflation after unexpectedly sharp price gains pushed the rate above the central bank's target, making it more likely the next move in interest rates will be higher.

Statistics Canada reported the annual inflation rate hit a 27-month high of 2.3 percent in May from 2.0 percent in April. Core inflation, which excludes some volatile items like gasoline, rose to 1.7 percent, the highest since July 2012, from 1.4 percent in April.

As recently as last week, Bank of Canada Governor Stephen Poloz had said the underlying rate of inflation, which he pegged at 1.2 percent, was so low it "leaves us vulnerable to a downside shock at any time."

The central bank aims for 2 percent inflation and to keep it within a range of 1 to 3 percent. While acknowledging higher inflation readings in its June 4 rate statement, it said increased risks to growth left "the downside risks to the inflation outlook as important as before."   Continued...