Bank of Canada: above-target inflation won't last

Mon May 16, 2011 4:21pm EDT
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By Randall Palmer and Louise Egan

OTTAWA (Reuters) - Canadian inflation will stay above the central bank's target range in the second quarter, Bank of Canada chief Mark Carney said on Monday, while appearing to be in no rush to raise interest rates to keep prices in check.

Carney said inflation would remain above 3 percent, surpassing the bank's target range of 1 to 3 percent and overshooting the bank's forecast of 2.7 percent average inflation in the second quarter.

But he suggested that price pressures were temporary, the result of gasoline-price increases and provincial tax hikes, and that food inflation had seeped into the country sooner than expected.

"Over the balance of this quarter we do expect inflation to be above 3 percent -- that's total CPI inflation. That's ... largely driven by two factors: first is provincial taxes .... then secondly, energy prices, particularly gasoline prices," he said.

"The management of policy cannot be swung around for very short-term movements, particularly in an economy where inflation expectations are very well-anchored."

He said headline inflation and a "subdued" core inflation will converge at 2 percent by mid-2012, as the bank projected in April.

In a speech in Ottawa he broke no new ground on monetary policy and left market players betting that the central bank will raise interest rates in July or after, with no move on rates at the bank's May 31 policy-announcement date.

"This does not sound like a central bank poised to do anything soon," said Michael Gregory, senior economist at BMO Capital Markets.   Continued...