Inflation set to rise faster than expected
The
Bank of Canada
is on heightened alert for inflation and a stronger recovery than it had bargained for.
The central bank continues to hold
interest rates
at historic lows but is signalling to markets that inflation is running slightly higher and the economy, driven by "vigorous domestic spending" and a gradual recovery in exports, is expanding somewhat faster than it had projected, a juggling act for Governor Mark Carney.
Mr. Carney and his fellow policy makers at the Bank of Canada are now under more pressure in terms of how they time the first interest-rate hike after a lengthy run at near zero, economists say, and the next reading of inflation, due March 19, could be crucial to their thinking.
The economy grew in the fourth quarter at a 5-per-cent annualized pace, according to fresh data from Statistics Canada this week, while the Bank of Canada`s favoured measure of consumer prices - so-called core inflation, which strips out volatile items such as fuel - is at 2 per cent. The central bank targets 2-per-cent overall inflation; the core reading helps guide monetary policy, and it was initially not projected to reach that level until the second half of next year.
The Bank of Canada kept its benchmark overnight rate at 0.25 per cent yesterday, and promised again to hold it there through the end of June depending on the outlook for inflation. A second month of faster-than-expected price gains would increase the stakes as Mr. Carney approaches the point where he will lay out how the central bank plans to begin returning rates to pre-crisis levels. He has already sent a message of sorts, warning late last year that Canadians should not take on more debt than they can handle when borrowing costs rise
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