Canada’s core inflation rate rose more-than-forecast in February giving another boost to the loonie on speculation the Bank of Canada may be forced to hike interest rates to control inflation.
The Bank of Canada’s core index, which excludes the effect of volatile items such as fuel, fruit and vegetables, advanced 2.1% over the 12 months to February, following a 2.0% rise in January. Economists had expected the core rate to ease to 1.7%.
Higher car prices and a steep jump in accommodation costs during the Vancouver Olympics were the main factors driving February’s gain, Statistics Canada said.
“This is about one percentage point above the central bank’s target set last year,” said Thorsten Koeppl, assistant professor of economics at Queen's University.
“They thought things would be more benign and we’re now seeing signs monetary policy is running a little loose.”
The data gave an immediate boost to the Canadian dollar, which has been pushing towards parity with its U.S. counterpart, partly on expectations of an early rise in Canadian interest rates.
The loonie reached its highest since July 2008 at C$1.0062 to the U.S. dollar, or 99.38 cents US, up from Thursday's finish at C$1.0137 to the U.S. dollar, or 98.65 cents US. It eased back by noon to trade at 98.46.
The central bank has pledged to keep rates at historic lows until the end of the first half to stimulate economic growth unless prices spike. Koeppl said given the strength in Friday’s numbers the bank needs to make a decisive 50 basis point hike soon and clearly signal its intentions for further increases.
Some economists though say the strength of the dollar may help contain the pace of rate rises.
“The climbing Canadian dollar should have a cushioning effect down the road that may allow us to skip some rate hikes,” CIBC World Markets senior economist Avery Shenfeld said.
He also said reports Canada’s manufacturing sector had shrugged off the potential impact of the strong loonie were “premature.” The stronger dollar makes the country’s exports more expensive overseas.
“The current recovery is from a very deep trough and it could be at least two years before we really see the impact on manufacturing location decisions,” he said.
Overall, CPI rose 1.6% in the 12 months to February, compared with a 1.9% gain in January, StatsCan said.
Higher prices at the pump were another reason for February’s gain, with the cost of gasoline up 15.3% in the month. That’s mainly because of the steep drop in oil prices this time last year as the world economies plunged into recession.
The Olympics pushed up hotel and visitor accommodation prices by 16%, while the price of passenger cars put pressure on the index for a second month, gaining 3.5%, StatsCan said.
Overall, energy prices rose 4.0% between February 2009 and February 2010, following an 8.2% increase in the 12 months to January.
Excluding energy, the CPI rose 1.3% in the 12 months to February, matching the increase in January.
Six of the eight components of the CPI recorded gains in the month with only shelter and clothing and footwear declining, StatsCan said.
