Inflation shock revives rate hike talk

Tue Apr 19, 2011 11:23am EDT
 
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By Louise Egan

OTTAWA (Reuters) - Inflation in Canada soared in March, stunning markets, and when combined with signs of frothy first-quarter growth raised the likelihood the central bank will soon resume interest rate hikes.

Due to sharp rises in gasoline and food prices, the annual inflation rate shot up to 3.3 percent in March, Statistics Canada said on Tuesday, the highest level since September 2008 and above the Bank of Canada's comfort zone.

On a month-on-month basis, the consumer price index climbed 1.1 percent from February, the sharpest rise since January 1991.

"I was definitely surprised by the numbers. Everyone was surprised. (It was) quite a bit stronger than expected," said Jacqui Douglas, a senior currency strategist at TD Securities in Toronto.

"The markets have been tossing around when exactly the first (Bank of Canada) hike is going to come. It definitely looks like it's going to come in the next couple of months as opposed to later this year," she said.

The Canadian dollar strengthened after the report and markets began pricing in a slightly higher probability of rate hikes at every Bank of Canada policy-announcement date this year. Most still rule out a move on May 31 and see July as the earliest date the bank will tighten credit.

The core inflation rate, closely watched by the central bank, remained tame but it was also higher than markets had expected.

The Bank of Canada targets inflation at the midpoint of a 1 to 3 percent range.   Continued...