Bank of Canada sees inflation spiking, rates steady

Tue Jul 15, 2008 11:33am EDT
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By Louise Egan

OTTAWA (Reuters) - Canadian inflation could spike above 4 percent for the first time since 2003 next year, double the central bank target rate, but the Bank of Canada looks unlikely to respond with rate hikes at any time soon.

Meeting unanimous market expectations, the Bank of Canada on Tuesday held its overnight lending rate at 3 percent, citing risks from a weak U.S. economy and financial market turmoil.

It backed away from a hawkish tone of just one month ago and signaled it may stand pat on rates for the rest of the year.

"The comments of the bank are in my view quite a bit more neutral than the previous time in June, so I think the bank is really moving on to not changing rates for quite a while," said Carlos Leitao, chief economist at Laurentian Bank of Canada.

Markets initially pushed the Canadian dollar a notch lower, although the currency later rose to near a six-week high around US$1.002, or 99.77 Canadian cents to the U.S. dollar, as gloomy Fed comments drove the U.S. dollar lower.

In a statement announcing its interest rate decision, the Bank of Canada flagged higher inflation as the one development that has taken it by surprise.

But it made no hint of a future rate hike to rein in prices and suggested that the U.S. slowdown and the market turmoil made a future rate cut as likely as a future rate rise.

"Against this backdrop, the bank judges that the current level of the target for the overnight rate remains appropriate," it said.   Continued...

<p>Bank of Canada Governor Mark Carney leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa in this April 24, 2008 file photo. REUTERS/Chris Wattie</p>