Inflation jumps, rate change still seen far off

Bank of Canada unlikely to raise interest rates any time soon: Analysts
By David Ljunggren
|labour-reporter.com|Last Updated: 04/01/2013

(Reuters) — Canada's annual inflation rate jumped more than expected in February, but analysts said the spike was unlikely to pressure the Bank of Canada to raise interest rates any time soon.

The year-on-year rate rose to 1.2 per cent from a three-year-low of 0.5 per cent in January on higher gas and auto prices, Statistics Canada said on March 27.

That's still well below the midpoint of the Bank of Canada's 1.0 to 3.0 per cent target range.

The central bank has said it expects to raise interest rates one day, despite still-low year-on-year inflation. But the time frame for a possible rate hike has kept stretching out as domestic and global economies have stumbled.

"There will be a short-lived pop in the currency, but I don't think it is going to make a fundamental change in the bank's outlook," said Doug Porter, chief economist at BMO Capital Markets. "I don't think this advances the timetable on Bank of Canada rate hikes."

Analysts surveyed by Reuters in late February didn't expect any move by the central bank before next year.

Monthly inflation jumped to 1.2 per cent, the steepest month-on-month jump in prices since January 1991, when the federal government introduced a goods and services tax and prices were also up 1.2 per cent on the month.

Seven of eight components in the consumer price index were higher in February, with transportation prices — including gas prices — up particularly steeply.

"Anytime you get a monthly rise of more than one per cent in the headline is huge. Of course we've got to put in the context that we've just come off a period of remarkable calm in Canadian inflation and this looks to be quite the payback," said Porter.

Gas, vehicle prices up

The data helped briefly push the Canadian dollar higher against the U.S. dollar. It touched a session high of C$1.0155 versus the U.S. dollar, or 98.47 U.S. cents, up from C$1.0177, or 98.26 U.S. cents, immediately before the data.

"Anyone that is still contemplating rate cuts will have to revisit that with today's stronger than expected number," said Sebastien Lavoie, economist at Laurentian Bank. "But we have to put that in context and realize that previous CPI numbers over the last few months were quite tame."

Gas prices advanced 3.9 per cent year over year in February after dropping 1.8 per cent in the 12 months to January. February gas prices rose by 8.4 per cent from January, the largest month-on-month increase since the 8.8 per cent seen in May 2008.

The cost of passenger vehicles rose by 2.5 per cent in the 12 months to February, when the number of manufacturers' rebates dropped, after falling 0.8 per cent in the year to January.

The Bank of Canada's closely-watched core rate, which strips out prices of more volatile items such as energy and some foodstuffs, rose 1.4 per cent in the 12 months to February following a 1.0 per cent year-on-year advance in January.

The bank softened its stance on the need for interest rate hikes earlier this month, saying it was likely to hold its benchmark rate steady for "a period of time" given slack in the economy and tepid growth.

The central bank's overnight lending target has been at a near-record low of 1.0 per cent since September 2010.

"When you are looking at the annual growth in prices, we are back in the target range of the Bank of Canada. This was expected. The return to target is maybe earlier than expected, but it was expected quite soon," said Benoit Durocher, a senior economist at Desjardins.

"The inflation pressure should stay very low in the coming months. For the Bank of Canada, it doesn't change anything."

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