Canada rate hikes predicted despite tame inflation

Fri Apr 20, 2012 10:40am EDT
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By David Ljunggren

OTTAWA (Reuters) - A drop in Canada's year-on-year inflation rate to an 18-month low in March will not delay interest rate hikes by the Bank of Canada, which is paying closer attention to economic growth, analysts said on Friday.

Statistics Canada said the annual inflation rate fell to 1.9 percent in March from 2.6 percent in February, the lowest level since the 1.9 percent recorded in September 2010. Analysts had forecast a rate of 2.0 percent.

The Bank of Canada, which targets a 2.0 percent inflation rate, this week made it clear it might have to start raising rates from near-historical lows because of reduced slack in the economy and increased underlying inflationary pressures.

The central bank has kept rates unchanged since September 2010.

"We now see the bank firmly in a data dependent mode as it considers when and how much of the considerable monetary stimulus currently in place will need to be withdrawn," said TD Securities strategist David Tulk. "There is nothing in this report in our view that will influence the outlook for monetary policy."

A Reuters survey of primary market dealers this week showed the median forecast for the timing of the next rate increase had moved to the first quarter of 2013 from the third quarter of 2013.

Statscan said the cost of energy was up 5.1 percent in the 12 months to March, versus a 7.2 percent year-over-year rise in February. Food prices were up by 2.2 percent in the year to March, lower than the 4.1 percent comparable jump in February.

The closely watched annual core inflation rate dropped to 1.9 percent in March from 2.3 percent in February. The core measure strips out prices of volatile items such as fuel and some foodstuff.   Continued...