OTTAWA (Reuters) - Inflation in Canada was slightly higher than expected in April, providing the Bank of Canada with more reason, if the European crisis doesn’t undermine the economy, to launch the interest-rate hike it has hinted at recently.
On an annual basis the overall inflation rate rose to 2.0 percent in April from 1.9 percent in March, Statistics Canada said on Friday. The core rate, which excludes volatile items, climbed to 2.1 percent from 1.9 percent.
“From a strictly domestic standpoint, I think it does advance the case for the bank raising rates,” said BMO Capital Markets deputy chief economist Doug Porter.
However, he said that the euro-zone debt crisis is an important caveat: “Having said that, the bank also has to, of course, deal with the reality of a further flare-up in the European situation and I think that’s going to overwhelm domestic considerations.”
The median forecast in a Reuters survey of analysts had been for both inflation measures to stay at 1.9 percent. Only five of 24 analysts had expected the overall rate to rise, and none had foreseen a core rate as high as 2.1 percent.
Though several data points have bolstered the case for the central bank to raise rates, recent economic figure have not all been positive.
The latest reports for manufacturing, jobs, trade, housing and wholesale trade have been strong, while February gross domestic product and retail trade were weak.
In the past month, the bank has said several times it may have to withdraw stimulus from the economy.
“If the Bank of Canada at some point decides it should raise interest rates because of financial stability issues, the fact that inflation is at or slightly above target gives them enough reason to do so,” Laurentian Bank chief economist Carlos Leitao said.
“It would have been a problem if inflation starts to fall. The bank would have a hard time raising rates, but with inflation staying at, or slightly, above target, then if they do decide to move for other reasons they can.”
On a monthly basis, both total and core inflation were 0.4 percent in April.
A 3.2 percent rise in gasoline prices and 1.3 percent in passenger vehicle prices pushed up the monthly inflation data, but this was tempered by an 8.2 percent fall in natural gas prices.
The Canadian dollar and bond yields both jumped briefly after the release of the inflation data.
The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate moves, rose to 1.25 percent after the figures were out from 1.228 percent just before. By midmorning, however, it was back to 1.224 percent.
Yields on overnight index swaps also rose before retreating to pre-data levels. A week ago the market had almost completely priced in a 25-basis-point rate hike by December but it has now reduced that probability to under 50 percent.
Reporting by Randall Palmer. Editing by Bernadette Baum; and Peter Galloway