The Bank of Canada came under pressure on Friday to stop fretting about low inflation after unexpectedly sharp price gains pushed the rate above the central bank’s target, making it more likely the next move in interest rates will be higher.
Statistics Canada reported the annual inflation rate hit a 27-month high of 2.3 percent in May from 2.0 percent in April. Core inflation, which excludes some volatile items like gasoline, rose to 1.7 percent, the highest since July 2012, from 1.4 percent in April.
As recently as last week, Bank of Canada Governor Stephen Poloz had said the underlying rate of inflation, which he pegged at 1.2 percent, was so low it “leaves us vulnerable to a downside shock at any time.” —
“The low-inflation ship has sailed in Canada, and I think the Bank of Canada pretty much has to change their rhetoric as of the next meeting,” said Bank of Montreal chief economist Doug Porter.
Poloz said the central bank’s policy stance was neutral, specifying that rates could just as easily fall as they could rise, using dovish language that has kept a lid on rate hike expectations and the currency.
Still, yields on overnight index swaps show rate cut expectations have largely faded.
And even before Friday’s data economists were unanimous that the next rate would be a hike. —
“We are still of the view that any moves on rates are not likely until 2015, but certainly there is now a higher probability of hikes coming sooner rather than later,” said Royal Bank of Canada assistant chief economist Paul Ferley.