* Total inflation 2.0 pct on annual basis, 0.4 pct monthly
* Core inflation 2.1 pct on annual basis, 0.4 pct monthly
* 19 of 24 analysts forecast inflation of 1.9 pct or less
* No analyst had predicted core as high as 2.1 pct
* Europe's problems could impede rate hike
By Randall Palmer
OTTAWA, May 18 Inflation in Canada was slightly
higher than expected in April, providing the Bank of Canada with
more reason, if the European crisis doesn't undermine the
economy, to launch the interest-rate hike it has hinted at
On an annual basis the overall inflation rate rose to 2.0
percent in April from 1.9 percent in March, Statistics Canada
said on Friday. The core rate, which excludes volatile items,
climbed to 2.1 percent from 1.9 percent.
"From a strictly domestic standpoint, I think it does
advance the case for the bank raising rates," said BMO Capital
Markets deputy chief economist Doug Porter.
However, he said that the euro-zone debt crisis is an
important caveat: "Having said that, the bank also has to, of
course, deal with the reality of a further flare-up in the
European situation and I think that's going to overwhelm
The median forecast in a Reuters survey of analysts had been
for both inflation measures to stay at 1.9 percent. Only five of
24 analysts had expected the overall rate to rise, and none had
foreseen a core rate as high as 2.1 percent.
Though several data points have bolstered the case for the
central bank to raise rates, recent economic figure have not all
The latest reports for manufacturing, jobs, trade, housing
and wholesale trade have been strong, while February gross
domestic product and retail trade were weak.
In the past month, the bank has said several times it may
have to withdraw stimulus from the economy.
"If the Bank of Canada at some point decides it should raise
interest rates because of financial stability issues, the fact
that inflation is at or slightly above target gives them enough
reason to do so," Laurentian Bank chief economist Carlos Leitao
"It would have been a problem if inflation starts to fall.
The bank would have a hard time raising rates, but with
inflation staying at, or slightly, above target, then if they do
decide to move for other reasons they can."
On a monthly basis, both total and core inflation were 0.4
percent in April.
A 3.2 percent rise in gasoline prices and 1.3 percent in
passenger vehicle prices pushed up the monthly inflation data,
but this was tempered by an 8.2 percent fall in natural gas
The Canadian dollar and bond yields both jumped
briefly after the release of the inflation data.
The yield on the two-year Canadian government bond
, which is especially sensitive to Bank of Canada
interest rate moves, rose to 1.25 percent after the figures were
out from 1.228 percent just before. By midmorning, however, it
was back to 1.224 percent.
Yields on overnight index swaps also rose before retreating
to pre-data levels. A week ago the market had almost completely
priced in a 25-basis-point rate hike by December but it has now
reduced that probability to under 50 percent.