Canadian inflation surges, boosts chances of September rate hike

OTTAWA (Reuters) - Canada’s annual inflation rate surged to 3.0 percent in July, its highest level in nearly seven years, raising expectations that the Bank of Canada might raise interest rates again as soon as next month and pushing the Canadian dollar higher.

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The inflation rate, which last eclipsed 3.0 percent in September 2011, was much stronger than the 2.5 percent forecast by analysts in a Reuters poll. Inflation in June was 2.5 percent.

The Bank of Canada, which raised rates in July for the fourth time in a year, has an inflation target of 2.0 percent.

“This certainly raises the probability of a move (upward) in September by the Bank of Canada, but there’s going to have to be further confirming evidence of strength in the economy and inflation pressure building,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Chances of a rate hike next month rose to nearly 30 percent from less than 20 percent on Thursday, the overnight index swaps market showed.

The Canadian dollar CAD=D4, which had been pressured this week by worries that emerging market stress could slow demand for the commodities that Canada produces, climbed as much as 0.6 percent after the data.

Still, energy prices were the biggest contributor to the higher inflation rate, which could give the central bank the flexibility to be patient.

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“The fact that it was driven by one-offs ... this is something that the Bank (of Canada) can look through, going forward,” said Brittany Baumann, macro strategist at TD Securities.

Energy prices rose 14.2 percent from July 2017, helped by a 25.4 percent jump in gasoline prices.

While all eight major components of inflation rose on a year-over-year basis, measures of core inflation were roughly stable. CPI trim, which excludes upside and downside outliers, rose to 2.1 percent from 2.0 percent in June. The CPI median was 2.0 percent while the CPI common was 1.9 percent.

Separate data showed that foreign investment in Canadian securities jumped to C$11.5 billion in June from C$3.0 billion in May as non-residents bought Canadian bonds at the fastest pace in seven months.

Still, in the first six months of this year foreign investment in Canadian securities has tumbled to C$43.7 billion from C$98.2 billion in the same period in 2017. Canada depends on portfolio inflows to finance a current account deficit of more than C$60 billion annually.

Reporting by Fergal Smith; Editing by Susan Thomas and Paul Simao