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

Fri Jun 20, 2014 2:26pm EDT
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By Randall Palmer

OTTAWA (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."

But economists said on Friday that position was becoming increasingly untenable and said a change in language would be in order, though nobody expects an immediate rate hike.

"The low-inflation ship has sailed in Canada, and I think the Bank of Canada pretty much has to change their rhetoric as of the next meeting," said Bank of Montreal chief economist Doug Porter.

It may be tricky for the central bank to shift its tone without at the same time causing a strengthening in the Canadian dollar that would hurt exports, similar to sterling's strong rise when Bank of England Governor Mark Carney said last week rate hikes could happen sooner than expected.

National Bank Financial senior economist Krishen Rangasamy believes the Bank of Canada, formerly headed by Carney, will want to downplay inflationary pressures and reductions in the output gap "so as to keep the Canadian dollar weak."   Continued...

The Bank of Canada building is pictured in Ottawa July 19, 2011. REUTERS/Chris Wattie