UPDATE 1-PREVIEW-Canada April inflation seen at 3.4 pct

Fri May 13, 2011 3:54pm EDT

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 (Updates to make clear these are final poll results)
 WHAT: Canada's consumer price index for April
 WHEN: Friday, May 20 at 7 a.m. EDT (1100 GMT)
                      April       March         Forecast
 Headline CPI m/m     +0.5 pct   +1.1 pct
 Headline CPI yr/yr   +3.4 pct   +3.3 pct      +2.8 pct
                                            to +3.7 pct
 CPI m/m              +0.2       +0.7 pct            
 Core CPI yr/yr       +1.6 pct   +1.7 pct      +1.4 pct
                                            to +1.8 pct
 For individual forecasts see: [ID:nECICA]
 FACTORS TO WATCH: Headline inflation is expected to reach a
fresh 2-1/2 year high of 3.4 percent in April as gasoline
prices jump further and food prices rise to a lesser extent.
 Core inflation, which strips out volatile items like
gasoline, is seen easing to 1.6 percent after a sharp jump in
 Analysts expect most of the boost to the monthly consumer
price index to come from commodities, partially offset by
softer prices for autos, clothing and fresh vegetables.
 The big question is whether the pinch from gas and food
will be enough to worry the Bank of Canada, which must keep
inflation in check while taking care not to stunt a fragile
economic recovery with premature rate hikes.
 Last month's eye-popping CPI numbers -- a 3.3 percent
overall inflation rate -- prompted markets to start pricing in
a slightly higher probability of rate hikes at every rate
announcement date this year.
 But the bank must also weigh mixed signals from the U.S.
economy, which affects the health of exporters, and impact of
the strong Canadian dollar in dampening prices.
 The Bank of Canada, like the U.S. Federal Reserve, does not
expect high commodity prices to have a lasting effect on
Targeting 2 percent inflation, the bank keeps a close watch
on the core rate, which it says leads the headline figure. It
has forecast 1.4 percent core inflation in the second quarter
compared with 2.7 percent for headline inflation. It sees both
measures converging at the target by the middle of 2012.
 Most market players believe a May 31 rate hike is off the
table for the Bank of Canada. But if inflation jumps more than
expected in April, they could more confidently bet on a July
rate increase, triggering a rally in the Canadian dollar.
 A steady or slowing rate of inflation would signal the
opposite, with the September, October and December policy
announcement dates coming into focus.
 According to a Reuters calculation of overnight index
swaps, markets now see a 97.9 percent chance rates will remain
on hold on May 31. They have fully priced in a quarter-point
increase by Oct. 25. BOCWATCH
 The bank lifted borrowing costs three times last year to
1.0 percent but has sat on the sidelines since September.
 (Reporting by Louise Egan; editing by Janet Guttsman)

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