September 19, 2014 / 12:38 PM / 3 years ago

Above-target inflation puts rate pressure on Bank of Canada

OTTAWA (Reuters) - Canada’s annual inflation rate remained above the Bank of Canada’s 2.0 percent target in August for the fourth month in a row, putting pressure on the central bank to drop its neutral stance on interest rates.

Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007. REUTERS/Christinne Muschi

Statistics Canada said on Friday overall inflation held firm at 2.1 percent while the closely watched core rate unexpectedly jumped to 2.1 percent from 1.7 percent in July to hit a level last seen in April 2012.

The Bank of Canada, citing a below-par economy, says the next interest rate move could either be a hike or a cut, but analysts said the new data called this into doubt. Central banks generally raise rates to cool inflation.

“With inflation on both headline and core now about 2 percent, there is a limit to how long the Bank of Canada can continue to maintain its current tone,” said Camilla Sutton, chief currency strategist at Scotiabank.

The Bank of Canada is taking a relaxed attitude to the overall inflation rate, which peaked at a 28-month high of 2.4 percent in June, and forecasts it will drop below 2 percent in the first half of 2015.

The central bank said earlier this month that recent data reinforced its view that higher inflation had been attributable to temporary effects.

Statscan said the driver for the year-on-year increase in overall prices was higher shelter costs. The spike in core inflation was fueled by higher telephone and transportation costs.

“Given the broad nature of the gains, it might be tough for the bank to argue the increases are transitory, and a continued upward trend will be difficult to overlook,” said Benjamin Reitzes, senior economist at BMO Capital Markets.

The Canadian dollar rose as high as $1.0915, or 91.62 U.S. cents, against the U.S. dollar after the figures were released, stronger than Thursday’s close of C$1.0947, or 91.35 U.S. cents.

The Bank of Canada has kept its key rate at a near record low 1 percent for more than four years to try to stimulate the economy and says there is no chance of a hike until it sees signs of a sustained recovery.

“Certainly it (the inflation data) raises the prospect of the Bank of Canada returning to tightening mode sooner than what had previously been expected,” said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

A Reuters poll in late August showed most market operators do not expect the central bank to raise rates until the second half of 2015.

Although Canada’s hard-hit export sector is showing signs of revival, other parts of the economy remain sluggish.

Separately, Statscan said Canadian wholesale sales in July dropped by 0.3 percent from June, pulled down in part by lower sales of agricultural supplies.

Analysts had expected a 0.6 percent rise in July after three consecutive month-on-month advances. In volume terms, sales fell by 0.6 percent.

Additional reporting by Solarina Ho in Toronto; Editing by Peter Galloway

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