Bank of Canada sees inflation above target range
Reuters
1:08 PM, E.T. | May 16, 2011
Canadian, Economy AA Follow this Canadian inflation will remain above 3 percent for now, surpassing the central bank's target range, Bank of Canada Governor Mark Carney said on Monday, but he gave no further clues on the timing of possible rate hikes.
Sharp increases in energy prices and added provincial sales taxes were responsible, he said. The central bank still sees total inflation declining to 2 percent and a "subdued" core inflation rising to that level by mid-2012, as projected in April.
In April the bank had predicted inflation would peak at 3 percent in the second quarter, but Carney pointed out it had already exceeded that level in March and it would stay there "in the short term." The bank aims to keep inflation at the midpoint of its target range of 1 to 3 percent.
Carney also said that recent commodity price declines notwithstanding, the demand for commodities could be expected to remain robust for some time.
"Even though experience suggests that all booms are finite, this one could go on for some time," he said in a speech in Ottawa, adding that recent declines were "fluctuations around high levels."
However, while higher commodity prices boost profits, production and investment in Canada's primary sector, Canada will not benefit to the same extent as in past commodity booms driven by U.S. growth. Higher prices act as a net brake on U.S. growth, and "the effect is material."
The strong Canadian dollar "could create even greater headwinds for our economy, putting additional downward pressure on inflation," he said.
Carney also warned of excessive foreign exchange and financial market volatility if investors seeking more emerging market exposure shifted capital into Canada and Australia, seen as emerging market proxies because of their strong commodity sectors.
Regarding Canadian monetary policy, he repeated an April statement that the bank's decision so far to leave interest rates at 1 percent "leaves considerable monetary stimulus in place, consistent with achieving the 2 percent inflation target in an environment of material excess supply in Canada."
The bank became the first in the Group of Seven advanced economies to begin raising interest rates last year, increasing borrowing costs three times. It has held them steady since September and a majority of primary securities dealers expect it to resume tightening in July. |
