Canada inflation still well above target, rate hike seen likely

OTTAWA (Reuters) - Canada’s inflation rate dipped to 2.8 percent in August but remained above the Bank of Canada’s target for the seventh consecutive month, boosting expectations the central bank will raise rates again in October.

FILE PHOTO: People shop inside at the Hudson's Bay Company (HBC) flagship department store in Toronto January 27, 2014. REUTERS/Mark Blinch/File Photo

Statistics Canada said on Friday the rate had fallen from the 3.0 percent in July as the pace of increase of gasoline prices eased. The rate matched the forecast of analysts in a Reuters poll.

The central bank - which has increased interest rates four times since July 2017 - maintains a 2 percent target for inflation. Its next fixed rate announcement date is Oct. 24.

“The market is already leaning extremely heavily to the Bank going in October. I think that while this doesn’t lock it in, it certainly increases the odds another notch at least,” said Doug Porter, chief economist at BMO Capital Markets.

Market expectations of an interest rate hike in October, as reflected in the overnight index swaps market, rose to 88.74 percent from 84.46 percent before the release of the inflation data.

The central bank this month said the inflation rate should move back toward 2 percent in early 2019 as the effects of past increases in gasoline prices dissipate.

All of the central bank’s core inflation measures were 2.0 percent or higher in August, for the first time since February 2012. CPI common, a gauge of inflation favored by the bank, rose to 2.0 percent from 1.9 percent.

Bank of Canada Governor Stephen Poloz is due to give a speech and news conference on Sept 27.

“I think he has a bit more explaining to do in terms of how strong his guidance was to look through the July number as transitory,” said Derek Holt, vice president of capital markets economics at Scotiabank.

The Canadian dollar strengthened to C$1.2891 to the U.S. dollar, or 77.57 U.S. cents.

Statscan’s data showed that gasoline prices had increased by 19.9 percent over August 2017, down from the 25.4 percent year-over-year jump in July.

The price of non-durable goods also increased at a more moderate pace, climbing 3.8 percent from August 2017 compared with 4.4 percent in July.

Separately, Statscan said Canadian retail trade rose 0.3 percent in July from June, on higher sales at food and drink stores as well as gasoline stations.

Analysts in a Reuters poll had forecast a 0.4 percent gain.

Additional reporting by Fergal Smith and Susan Taylor in Toronto; Editing by Steve Orlofsky