August 19, 2011 / 11:19 AM / 6 years ago

Canada inflation rate eases, eyes on bank governor

<p>Bank of Canada Governor Mark Carney speaks during a news conference upon the release of the Monetary Policy Report in Ottawa July 20, 2011. REUTERS/Chris Wattie</p>

OTTAWA (Reuters) - Canada’s annual inflation rate dipped as expected in July, prompting little excitement from markets waiting for crucial testimony from Bank of Canada governor Mark Carney later on Friday.

Carney, who will appear before a parliamentary committee at 10 a.m., is expected to cut the central bank’s short-term growth forecast and provide more details about when interest rates might move.

Statistics Canada said the annual inflation rate dropped to 2.7 percent in July from 3.1 percent in June, in part because the introduction of higher sales taxes in three provinces is no longer included in calculations.

Although July marked the 10th straight month that overall inflation has been above the Bank of Canada’s 2 percent target, the figure was well below the eight-year high of 3.7 percent recorded in May. Market analysts had forecast the July rate would be 2.8 percent.

“This is basically in line with market expectations, nothing too shocking one way or the other,” said David Tulk, chief Canada macro-strategist at TD Securities. “(It) basically sets the stage for Governor Carney to speak at 10, which I think is going to be the market driver.”

The bank signaled on July 19 it was closer to raising rates, although only if the economy continued to advance.

Downbeat data since then strongly suggests there was little if any growth in the second quarter, and markets no longer expect a rate hike in the foreseeable future.

<p>Bank of Canada Governor Mark Carney prepares to testify before the House of Commons finance committee on Parliament Hill in Ottawa August 19, 2011. REUTERS/Chris Wattie</p>

“This report at least gives the Bank of Canada some flexibility in being comfortable leaving rates unchanged through the end of the year and into next year,” said Jimmy Jean, economic strategist at Desjardins Capital Markets.

After the data Canada’s dollar rose slightly to C$0.9887 to the U.S. dollar, or $1.011 U.S. dollars, up from around C$0.9912 to the U.S. dollar, or $1.0089.

The closely watched annual core inflation rate, which excludes prices of some volatile items, rose to 1.6 percent from 1.3 percent in June.

July’s data strips out the effect of a new sales tax introduced in July 2010 in Ontario and British Columbia. In the same month, Nova Scotia increased its sales tax by two percentage points.

Energy prices increased by 12.9 percent in the year to July, down from the 15.7 percent year-on-year rise recorded in June. The overall and core indexes both rose by 0.2 percent from June.

“Inflation is not an issue. (The Bank) is focused on growth. Right now the main concern is the volatility that we’re seeing in equity markets,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Less than a month ago the Bank predicted annualized growth in the second quarter of 2011 would be 1.5 percent.

Finance Minister Jim Flaherty will also testify to the committee starting at 9 a.m.

Reporting by David Ljunggren and Howaida Sorour; Editing by Padraic Cassidy

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