Canada Inflation Unexpectedly Quickens on Fuel Costs
http://www.bloomberg.com/apps/news?pid=20601082&refer=canada&sid=azE2XATCtnxo
May 21 (Bloomberg) — Canada’s annual inflation unexpectedly accelerated for the first time in five months in April on higher fuel and mortgage costs, giving the Bank of Canada less scope to cut the country’s benchmark interest rate.
Consumer prices rose 1.7 percent from a year earlier, Statistics Canada said today. Economists surveyed by Bloomberg said inflation would stay at March’s 1.4 percent pace, a 14- month low. Consumer prices rose 0.8 percent from March, the fastest in more than a year and twice as much as forecast.
The Bank of Canada has cut its rate at each of its past four meetings, lowering it to 3 percent from 4.5 percent in December. Canada’s dollar gained as the report indicated that higher prices, coupled with improving credit markets, may mean the central bank will soon end its series of rate cuts.
“While they may still cut rates in June, it’s looking more and more likely they will go on a pause through the summer,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto.
The currency strengthened 0.9 percent to 98.34 cents per U.S. dollar at 4:13 p.m. in Toronto from 99.23 cents yesterday. Earlier it touched 98.20 cents, the highest since March 14.
Bank Governor Mark Carney lowered the key rate by half a percentage point last month and signaled more action was needed. He is scheduled to speak about liquidity in financial markets tomorrow in New York.
Possible Cut Line
Inflation remains below the Bank of Canada’s 2 percent target and economists say the central bank will cut interest rates at least once more to offset a slowing economy.
“I don’t think it jeopardizes the bank’s willingness to lower rates,” said Stefane Marion, assistant chief economist at National Bank Financial in Montreal, who predicts two more rate cuts this year. “Inflation will remain very well behaved” while exports “will remain challenged,” he said.
Meanwhile, bond investors are paying a bigger premium to hold debt that’s protected against inflation, indicating they expect prices will accelerate further. The gap between yields on regular government bonds due in 20 years and inflation- protected bonds has widened to 2.47 percentage points, the most since last July, from 2.13 points on Feb. 26.
Central bankers will likely cut interest rates by another 50 basis points at their June 10 meeting, Scotia Capital said in a note to investors following today’s report.
`Achilles’ Heel’
Canada’s inflation is slower than the U.S. pace of 3.9 percent and Germany’s 2.4 percent.
Still, rising prices for staple goods such as gasoline and food risk fueling wage demands, said Stewart Hall of HSBC Securities in Toronto.
“The Achilles’ heel here is that those areas of pricing pressure are found in the staples category,” Hall, a market strategist at HSBC Securities, said by telephone.
The rate-cut cycle “is coming to an end,” he said.
Gasoline rose 12 percent in April from a year ago as overall fuel costs surged 37 percent, while mortgage interest costs rose 8.7 percent, the fastest since May 1991.
Inflation accelerated in April in part because car dealers scaled back price discounts, Statistics Canada said. The cost of bakery products also rose 10 percent in April from a year earlier, the fastest since November 1981.
Higher prices “are squeezing the budgets of some Canadian families,” Prime Minister Stephen Harper said today. Inflation is still “very low” by historical standards, he told reporters in Beamsville, Ontario, in part because the Canadian dollar’s rise has prevented even higher gasoline prices.
Core Inflation
The core inflation rate advanced 1.5 percent from a year earlier, compared with 1.3 percent in March that was the slowest since July 2005. Economists predicted that measure would be unchanged. The monthly core inflation rate of 0.3 percent was also faster than the 0.2 percent that economists forecast.
The core rate, used by policy makers as a guide to future trends, excludes volatile items such as gasoline and fruit and discounts tax cuts such as a reduction in the federal sales tax earlier this year.
Bank of Canada policy makers last month said inflation would stay below their target until 2010, as a strong Canadian dollar makes automobiles cheaper and grocery stores compete to keep food prices down.
The currency’s surge to parity with the U.S. dollar last year prompted consumers to demand lower prices for imports such as cars and books, and acted as a shield against more expensive commodities priced in U.S. dollars. The currency hit a record 90.58 Canadian cents per U.S. dollar on Nov. 7.
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.
