UPDATE 2-Canada's April inflation rate edges up to 2.0% on carbon levies

(Adds analyst comments, market reaction)

By Steve Scherer

OTTAWA, May 15 (Reuters) – Canada’s annual inflation rate edged up to 2.0% in April from 1.9% in March, driven in part by a carbon levy that pushed up gasoline prices in six provinces, Statistics Canada data showed on Wednesday.

Prices gained 0.4% from the previous month, led by a 10% rise in gasoline prices, Statscan said, in line with a Reuters survey of analysts. The annual rate rose to the Bank of Canada’s 2.0% target for the first time since December.

Prime Minister Justin Trudeau slapped a carbon tax on four provinces in April because they had not followed federal guidelines to create their own carbon pricing plan. Two other provinces also increased their carbon levies in April.

Carbon pricing has become a battleground issue between the federal Liberal government and provincial conservative leaders, several of whom are challenging the imposition of the federal levy in court ahead of the October general election.

The Canadian dollar weakened to a six-day low at 1.3493 to the U.S. dollar, or 74.11 U.S. cents, while money markets were factoring in a slightly higher chance of an interest rate cut by year end at more than 40 percent.

“The Bank of Canada has aspirations for raising rates further, but the global economy is going to get in the way of that,” said Doug Porter, chief economist at BMO Capital Markets. “I’d have to agree with market that there’s a slightly higher chance of them next trimming rates than hiking.”

There have been mixed signals from the economy recently. Canada added a record 106,500 jobs in April, but a central bank survey released last month showed business sentiment had turned slightly negative as a result of a weak energy sector, a housing slowdown and global trade tensions.

Late last month the central bank kept interest rates steady and removed wording around the need for future hikes, following five increases since July 2017. It also lowered its growth forecast for this year, in part because of global headwinds.

“The takeaway here is that inflation is broadly in line with the Bank of Canada’s target on the back of some pretty strong recent activity measures for the Canadian economy,” said Derek Holt, vice president of capital markets economics at Scotiabank.

CPI common, which the central bank says is the best gauge of the economy’s underperformance, was at 1.8%, the same as the previous month.

CPI median, which shows the median inflation rate across CPI components, was at 1.9%, while CPI trim, which excludes upside and downside outliers, was at 2.0%.

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