ECB and Canada look to raise rates ( 2 articles)
Canada inflation tops forecasts, spurs rate talk
Tuesday, June 20, 2006 8:34:24 AM (GMT-06:00)
Provided by: Reuters News
By Louise Egan
OTTAWA, June 20 (Reuters) - Consumer inflation in Canada romped unexpectedly higher in May as gasoline prices rose, fanning expectations that the Bank of Canada might be spurred to raise interest rates once again.
Canada's overall annual inflation rate sped up to 2.8 percent, above forecasts for 2.7 percent, while core inflation touched a 29-month high of 2.0 percent, Statistics Canada said on Tuesday.
Analysts surveyed by Reuters had expected annual core inflation, which excludes volatile items and is key to central bank policy-setting, of 1.7 percent.
The report, combined with a blockbuster jobs report in May and better-than-expected economic growth in the first quarter, could force the Bank of Canada to lean toward another rate increase this year, despite signaling in May that it would move to the sidelines after seven consecutive hikes.
"You could dismiss this as one bad month but nonetheless, the trend is not good and you've got an economy operating at very high utilization rates," said George Vasic, chief Canadian economist at UBS in Toronto.
"Our view is that it would be quite an about-face to raise rates on July 11 so we believe (the Bank of Canada) will raise again on September 6th."
Canada's overnight rate stands at 4.25 percent following the bank's last 25-basis-point increase, while the comparable U.S. federal funds rate is 5 percent.
Statistics Canada said headline consumer inflation and core inflation both came in at 0.5 percent on the month, surpassing market forecasts of 0.3 percent.
THE DODGE FACTOR
Market players will be watching a speech by Bank of Canada Governor David Dodge in Montreal on Wednesday for any signs he is deviating from his view, expressed in May, that interest rates are now at an "appropriate" level for keeping inflation within the bank's target range of 1 percent to 3 percent.
The Canadian dollar rallied versus the U.S. currency following the report, rising as high as C$1.1156 to the U.S. dollar, or 89.64 U.S. cents, compared with pre-data levels of around C$1.1225, or 89.09 U.S. cents. By 9:30 a.m. (1330 GMT) the currency had slipped slightly to to C$1.1173, or 89.51 U.S. cents.
Bonds, mostly unchanged ahead of the data, tilted sharply lower.
Canada has followed the U.S. Federal Reserve's lead on rate hikes and a chorus of warnings on inflation from the Fed this month has convinced investors that U.S. rates will rise at least one more time on June 29. The Fed has raised rates 16 consecutive times since June 2004.
"I would still lean toward a hike being more likely in September rather than July, although a July surprise could be likely if other indicators come in on the upside of market expectations," said Max Clarke, Canadian economist at IDEAglobal in New York.
The rise in Canada's core inflation was fueled by homeowners' replacement costs, car purchases and leases, electricity and restaurant meals, Statscan said.
Gasoline prices were the main force behind the overall price gains on an annual basis. Prices paid at the pump rose 18.6 percent on the year, up from 15.8 percent, although they declined slightly in May.
Excluding energy prices, consumer prices climbed 1.8 percent on the year in May versus 1.6 percent in April.
In the month, higher electricity bills and a seasonal spike in hotel rates explained the 0.5 percent price growth.
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ECB's Trichet signals path of gradual rate rises
Wednesday, June 21, 2006 5:48:51 AM (GMT-06:00)
Provided by: Reuters News
By Marcin Grajewski
BRUSSELS, June 21 (Reuters) - Euro zone economic growth is on a firm footing and interest rates remain low, European Central Bank President Jean-Claude Trichet said on Wednesday, signalling that a path of gradual credit tightening lies ahead.
In a passionate defence of the ECB's three rate rises over the past six months, Trichet deflected criticism by European politicians suggesting that the central bank should delay increases and do more to support growth.
Instead Trichet told a European Parliament committee that the ECB will not hesitate to make sure that inflation, running at an annual 2.5 percent in May, is kept under control especially given upside price risks from high oil costs.
"We are called to vigilance by the people of Europe in this respect," he told the Economic and Monetary Affairs Committee.
The ECB has no choice but to guarantee price stability, as laid down by European treaties and demanded by its citizens. "We will continue to do all that is necessary to counter inflationary risks and anchor inflationary expectations, and that seems to me is very well understood by observers," he said.
Although he repeated his comments made earlier in the month that no decisions have been made on future increases, he made clear that further rises are on the agenda.
"Our monetary policy in the euro area remains accommodative. It is essential to ensure that inflation expectations in the euro area remain firmly anchored at levels in line with our definition of price stability," he said.
Markets and ECB watchers understand this determination, Trichet said, implicitly endorsing pricing in financial markets for the ECB to raise rates again from 2.75 percent in late August and to reach 3.25 percent by the end of the year.
"... He is saying we will continue tightening," said Christel Aranda-Hassel, euro zone economist at Credit Suisse in London. "But I don't hear anything that would make me feel they would increase the pace. Gradualism is here to stay."
So far the ECB has tightened every quarter since December by 0.25 percentage points. The euro strengthened about half a cent against the dollar to $1.2630 and yields on euro zone government debt firmed on confirmation that the ECB appears set to continue at that steady pace.
"No rate hike for July, very likely no rate hike in early August. Obviously we remain on track for a 25 basis points per quarter pattern," said Rainer Guntermann, economist at Dresdner Kleinwort Wasserstein in Frankfurt.
GROWTH SUSTAINED
Solid economic growth over a number of months would remove an obstacle to the ECB continuing to raise interest rates.
Recent economic data for the second quarter has provided "encouraging signals", Trichet said. Earlier France reported that consumer spending rose at a surprisingly strong 5.6 percent year-on-year rate in May.
"Looking further ahead, the conditions and economic fundamentals are in place for growth to remain close to its trend potential rate on a sustained basis," Trichet told the committee in his most upbeat comments on growth in a long time.
ECB staff forecast that the economy will grow at about a 2.2 percent annual rate this year, easing to 1.8 percent next year, putting it on track for a growth at a level economists estimate the region can expand without generating price pressures.
Against this background, Trichet said that even after three rate rises, credit conditions are stimulative and support the economic expansion. Keeping inflation expectations low will be the most important contribution the ECB can make to keeping growth on track, he said, when pressed on why the central bank does not do more to help growth.
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