Inflation at 5-year high, rates seen on hold

Thu Aug 21, 2008 9:21am EDT
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By Louise Egan

OTTAWA (Reuters) - Soaring gasoline prices drove Canada's inflation rate in July to its highest in more than five years, but the upswing was widely expected and did little to change the view that the central bank will keep interest rates on hold in September.

The annual inflation rate quickened to 3.4 percent in July from 3.1 percent in June, the highest rate since March 2003, Statistics Canada said on Thursday.

But the core rate that is closely watched by the Bank of Canada stayed well within the bank's target at 1.5 percent for the fourth straight month.

The consumer price index rose 0.3 percent in the month, in line with market forecasts.

But there was little evidence that high energy prices were trickling into prices of other goods as the core index, which excludes gasoline and other volatile items, advanced by a lower-than-expected 0.1 percent.

The inflationary pressure comes as no surprise to the Bank of Canada, which is widely expected to hold rates steady at 3 percent on September 3 on the view that inflation will ease to the bank's 2 percent target by late 2009.

"These are close enough to expectations that it doesn't make a big impact on the Bank of Canada view," said Doug Porter, deputy chief economist at BMO Capital Markets.

"For the doves out there, the good news is that there wasn't a high-side surprise like there was in the U.S."   Continued...