July 15, 2008 / 1:14 PM / in 9 years

Bank of Canada holds rates, sees inflation spike

OTTAWA (Reuters) - The Bank of Canada held interest rates unchanged at 3 percent on Tuesday, as expected, but said inflation could rise above 4 percent for the first time since 2003 as commodity price hikes continue to outpace expectations.

<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>

Despite flagging inflation as the one development that has taken it by surprise, the central bank did not make any hint of a future rate hike. Instead, it said that the inflation risk was offset by a protracted U.S. economic slowdown and financial market turbulence.

“Against this backdrop, the bank judges that the current level of the target for the overnight rate remains appropriate,” it said. “The bank will continue to monitor carefully the evolution of risks, together with economic and financial developments in the Canadian and global economies, and set monetary policy consistent with achieving the inflation target over the medium term.”

Consumer inflation should spike sharply above the bank’s target range of 1-3 percent and peak in the first quarter of 2009, the bank said. Canada has not seen inflation of above 4 percent since March 2003. Core inflation, which strips out volatile items like gasoline and food, will remain at about 1.5 percent through the third quarter. The bank sees both measures of inflation converging at 2 percent in the latter half of 2009.

The bank also cut the 2008 economic growth projection to 1 percent from 1.4 percent previously. Its forecast for 2009 growth is down to 2.3 percent from 2.4 percent previously while the 2010 outlook is unchanged at 3.3 percent.

Reporting by Louise Egan; Editing by David Ljunggren

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