UPDATE 1-Bank of Canada ignores C$-tied rise in March core inflation

Fri Apr 17, 2015 8:29pm EDT
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(Adds comments about economic forecasts, whether more rate cuts needed)

By Randall Palmer

WASHINGTON, April 17 (Reuters) - The Bank of Canada will ignore that part of the surge in March core inflation which is due to the fall in the Canadian dollar, Governor Stephen Poloz said on Friday, adding that the growing output gap was exerting downward pressure on inflation.

Canada's core inflation rose to 2.4 percent in March from 2.1 percent in February, putting it well above the central bank's 2 percent target. Poloz, however, said the jump was primarily due to higher prices for cars, which are sensitive to exchange rates.

The Bank of Canada does not see price rises from the exchange rate pass-through as fundamental inflation, he told journalists on the sidelines of the spring meetings of the International Monetary Fund and World Bank in Washington.

"As far as I know, the output gap's actually getting bigger as we sit here, not smaller, so the fundamental forces on inflation are downward, not upward," Poloz said.

The increase in the gap between the economy's output and its potential, which he expects to be short-lived, is due to the harsh effect of the oil price crash on investment and income in oil-rich Canada.

Falling oil prices have weighed on the Canadian dollar, which has fallen by about 12 percent against the U.S. dollar since last June.

Poloz held interest rates steady on Wednesday after a surprise cut in January, despite his estimate that economic growth ground to a halt in the first quarter because of the drop in oil prices. He is banking on the economy picking up steam in the rest of the year.   Continued...