Will Canada’s CPI Push BOC to Hike Interest Rates?

Just when we thought that Canada was getting boring again, its CPI figures come in way higher than what most analysts had expected. In fact, looking closely at the report you’ll see that consumer prices in the country are firing up on almost all its cylinders!

A report released on Tuesday revealed that Canada’s headline inflation rate for March came in 3.3% higher than its figure 12 months ago. The number not only beat market expectations, but also translated to the fastest increase since September 2008. That was way back when Al Pacino and Robert De Niro were playing detectives in Righteous Kill!

Digging further into the report, we’ll also see that except for alcoholic beverages and tobacco products, prices of all CPI components have gone up faster than their rates in February. Transportation prices have gone by 6.6% since March 2010 after clocking in a 5.1% in increase last February. In addition, food prices rose by 3.3% in March compared to February’s 2.1% increase when bad weather in Mexico and the U.S. cut supply.

Because of these hot inflation figures, many traders are buzzing about a possible BOC interest rate hike. From what I’ve heard, the BOC‘s inflation range is only between 2% to 3%. If you ask me though, I think we’re more likely to see Charlie Sheen get his old show back than hear a rate hike from the BOC next month.

Panic button

For one, BOC Governor Mark Carney said that core inflation still remains within the BOC’s target, coming in at an annual rate of 1.7%. He even bet his Justin Bieber poster collection that consumer prices (excluding food and energy) would stay below the bank’s target until next year!

Another issue that’s putting the BOC between a rock and a hard place is the Loonie‘s strength. Just a couple of weeks ago, we saw the Loonie tap a new three-year high against the dollar thanks in part to the surge in Canada’s biggest export, the Black Crack.

So why is this a problem? Remember that a strong Loonie makes Canadian exports less competitive as foreigners need more of their domestic currency to acquire the goods. The BOC crew is worried that a rate hike would only feed the Loonie’s strength and weigh on the country’s export sector which is already burdened by weakening demand from its biggest export partner, the U.S.

Yes, we’ve seen the Canadian economy print some pretty impressive figures lately. However, I don’t think they will be enough to convince Canada’s central bankers to holler an interest rate hike. Well, at least not in its next monetary policy meeting on May 31. So don’t hold your breath!

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