May 21, 2010 / 11:16 AM / in 8 years

April inflation tops forecast at 1.8 percent

OTTAWA (Reuters) - Canadian inflation was slightly higher than expected in April on a rise in gasoline and auto prices, keeping alive the possibility of a June interest rate hike by the Bank of Canada.

<p>A gasoline pump nozzle is seen at a gas station in this 2008 file photo. REUTERS/Jim Young</p>

The consumer price index gained 0.3 percent in the month for an annual inflation rate of 1.8 percent, Statistics Canada said on Friday. The rate quickened from 1.4 percent in March and topped the consensus forecast of 1.7 percent.

Analysts said the report did little to change the overall inflation outlook and would not likely be the main factor determining central bank policy.

“I don’t think it really adds a lot to the mix for the June 1 rate decision. The way it stands now, it’s slightly tilted for the bank to go,” said Mark Chandler, fixed income strategist at RBC Capital Markets.

The Canadian dollar briefly firmed just after the report but then weakened to C$1.0722 to the U.S. dollar, or 93.27 U.S. cents, from C$1.0696, or 93.49 U.S. cents just before the data.

Gasoline prices contributed most to the rise in CPI, while natural gas prices rose for the first time in a year.

Seven of the eight components of the CPI showed price increases in the year to April, Statscan said.

Core CPI, which excludes volatile items like gasoline, climbed 0.3 percent in the month for an annual rate of 1.9 percent, driven mostly by vehicle prices. Analysts forecast a 1.8 percent rate.

The report shows inflation heading closer to the Bank of Canada’s 2 percent target and may add pressure on the bank to raise its key interest rate on June 1 from the record low of 0.25 percent.

After the bank’s announcement in April that it was withdrawing its conditional pledge to hold rates at 0.25 percent until the end of June, markets had bet heavily on a June 1 rate hike, the first in the Group of Seven major industrialized economies.

But those expectations have since lessened over growing concerns about euro-zone sovereign debt.

“It really comes down to the European credit situation and financial markets, whether they can settle down over the next week. I think the Bank of Canada is probably more focused on that situation than the inflation story right now,” said Sal Guatieri, senior economist at BMO Capital Markets.

Yields on overnight index swaps, which reflect market expectations of the key policy rate, edged higher after the report and suggested a 54.52 percent chance the bank would raise rates by 25 basis points in June.

The Bank of Canada’s latest forecast is for inflation of 1.7 percent and core inflation of 1.9 percent in the second quarter. It sees core inflation easing slightly this year and staying near 2 percent in the medium term.

Editing by Padraic Cassidy

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