Bank of Canada in the spotlight as inflation hits eight-month high

Central bank to make scheduled decision on interest rates next week

TAVIA GRANT

Inflation is heating up, and it will take centre stage next week as the Bank of Canada makes a decision on interest rates and releases a report on the state of the economy.

The consumer price index rose to 2.3 per cent in March, its highest level in eight months, from a 2-per-cent rate in February, Statistics Canada said yesterday. Higher gasoline prices, home costs and fresh vegetable prices contributed to last month's increase.

The core rate, the key measure used by the Bank of Canada to determine where inflation is headed, eased to 2.3 per cent from 2.4 per cent the previous month. That was still above the central bank's 2.1-per-cent projection for the first quarter.

The report comes ahead of the central bank's scheduled interest rate decision on Tuesday and a monetary policy report, due Thursday.

"I think there will be some acknowledgment in the Bank of Canada statement that inflation has been running hotter than they expected," said Avery Shenfeld, a senior economist with CIBC World Markets Inc.

That said, he sees the risks to the Canadian economy as still balanced, with stronger inflation and job creation on one side and the threat of a deepening U.S. slowdown on the other.

Most economists expect the central bank to keep rates on hold at 4.25 per cent next week. But the pick-up in inflation will likely be noted.

"Core inflation remains too hot for the bank's comfort, and the non-core elements continue to bubble along noisily (especially food and energy)," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns, in a note.

"We suspect that next week's report . . . will remain officially neutral, but could hint that inflation risks are now a tad more important than growth concerns," Mr. Porter said.

On a monthly basis, inflation rose 0.8 per cent -- the fastest pace since September, 2005, when hurricane Katrina sent gasoline prices soaring.

Year over year, Canadian consumers paid 10 per cent more at the pump, the largest increase in eight months.

"Strong demand for gasoline in the United States translated into a continual decrease in American gasoline reserves over the last seven weeks," sending prices higher, Statscan said.

Mortgage interest costs also accelerated, gaining 5.4 per cent from a year earlier.

Homeowner's replacement costs rose 6.9 per cent.

Fresh vegetable prices and food bought in restaurants also exerted upward pressure, the report said.

A drop in natural gas prices moderated inflationary pressure last month. Natural gas prices fell 15.7 per cent in March compared with a year earlier.

Prices for computer and video equipment continued their downward trend of the past several years. Women's and men's clothing prices were also lower.

Inflation remains a regional story, rising most in Alberta, at 5.5 per cent, and least in New Brunswick, at 1.4 per cent.

Alberta's rate of inflation is three times the pace of Central Canada, Warren Lovely, an economist at CIBC World Markets Inc. observed.

"Western Canada -- particularly Alberta -- is clearly hot under the collar; ask anyone trying to get into the housing market in Calgary or Edmonton," he said in a note.

CTVglobemedia.

POSTED ON 20/04/07

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