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Chance of a rate hike fades further

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The Bank of Canada received further support on Friday that it should be in no rush to hike interest rates.

Annual inflation rose to 1.5 percent in June from 1.2 percent the previous month, as higher prices for automobiles and electricity outweighed a decline in prices for oil and natural gas.

Core inflation -- which is closely watched by the Bank of Canada as it strips out volatile items such as gas and food -- rose to 2 percent in June from 1.8 percent in May. The 2-percent mark is right in the middle of the Bank of Canada’s target range for inflation.

But, June’s reading came in below economists’ forecasts for 1.8 percent headline inflation and 2.3 percent core inflation.

On a month-over-month basis, the slowdown in inflation becomes even more obvious, with the seasonally adjusted headline figure falling 0.2 percent and core inflation increasing just 0.1 percent.

“Despite the many moving parts and all the dire headlines on food and energy, Canadian inflation remains remarkably stable. While food prices are poised to become an issue again, and potentially in a big way, most other costs remain well behaved,” says BMO’s Douglas Porter. “This reinforces the point that there is no pressure from this source for the Bank of Canada to move off the sidelines anytime soon.”

The inflation figures come on the heels of Tuesday’s announcement by the Bank of Canada to keep the benchmark rate at 1 percent -- the 15th consecutive time it has held the line on interest rates. And while the central bank didn’t fully backtrack from bullish comments made in April and maintained that its next move will be higher, it did cut its forecast for the Canadian economy.

It now expects the economy to grow 2.1 percent in 2012, below its previous forecast of 2.4 percent. Its forecast for 2013 was lowered to 2.3 percent from 2.4 percent. But it did hike its 2014 GDP forecast to 2.5 percent from 2.2 percent.

Economists say that combining the softer language from the central bank with weak inflation figures means there will be little impetus to hike rates in the near future.

“With inflation expectations well anchored and economic growth likely to remain below the economy's 2-percent potential rate, we anticipate that inflation will remain subdued for quite some time. Accordingly, we think that the Bank of Canada's tightening bias is misplaced,” says Capital Economics’ David Madani.

The Bank of Canada is one of the few banks to maintain its benchmark interest rate in the face of growing global economic uncertainty. Central banks in China and Europe, among others, have recently lowered rates, while the Bank of England announced another bond-buying program that will lower long-term interest rates.

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