Canadian inflation numbers came in lower than expected in June, but stayed above the Bank of Canada's 2 percent target, adding weight to the view that the bank will hike interest rates at least one more time.
Consumer prices fell 0.2 percent in June from May but were up 2.2 percent in the year as the cost of housing and gasoline rose, Statistics Canada said on Wednesday.
The core inflation rate, which excludes volatile items like gasoline, jumped back up to April's four-year high of 2.5 percent, after easing to 2.2 percent in May. The core rate was flat in June from May.
In the grand scheme of things, what this means is that the Bank of Canada is going to very much still have its finger on the tightening trigger, said Marc Levesque, chief strategist at TD Securities.
This is well above the Bank of Canada's target. We were saying there would be a rebound and that rebound did occur, he said, referring to the core inflation rate.
But inflation was lower than analysts in a Reuters poll had forecast, and the figures knocked the Canadian dollar from its 30-year high.
Analysts had, on average, expected overall inflation of 2.4 percent and a core rate of 2.6 percent.
The Canadian dollar eased to C$1.0477 to the U.S. dollar, or 95.45 U.S. cents, from pre-data levels around C$1.0434 to the U.S. dollar, or 95.84 U.S. cents. The currency touched highs of C$1.402 to the U.S. dollar, or 96.13 U.S. cents overnight.
Citing inflation pressures that were more persistent than it had expected, the Bank of Canada raised interest rates by 25 basis points to 4.50 percent on July 10 and hinted at further modest increases to come.
The bank expects both the overall year-on-year inflation rate and the core rate to stay above its 2 percent target until early 2009.
Although the bank is not going to set policy just based on one number, I think if we continue to see a bit of a moderation in the CPI data going forward, that would certainly lessen the call for some additional rate hikes beyond what are already priced into the curve, said George Davis, chief technical strategist at RBC Capital Markets.
Statscan said June gasoline prices declined from previous highs to push the consumer price index down 0.2 percent from May -- the first monthly decline since October 2006.
Statscan attributed most of the year-on-year price gains to a 5.7 percent jump in mortgage interest costs and a 6.1 percent rise in homeowners' replacement cost, calculated using new house prices.
The cost of operating a vehicle rose 2.8 percent due to hikes in gasoline and automotive parts, maintenance and repairs. (Additional reporting by John McCrank and Frank Pingue in Toronto)