Bank of Canada says inflation could remain hot if pressures persist

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FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) -The Bank of Canada said on Thursday that inflation could remain higher than projected if supply imbalances and pressures on capacity persist, which might lead it to reduce stimulus more quickly than currently expected.

When asked during a news conference if above-target inflation could be a sign there is less slack in the economy than the central bank is projecting, Deputy Governor Tim Lane said it was a "certainly a possibility."

Inflation hit 3.4% in April, its fastest pace in a decade, mostly due to base-year effects and high commodity prices. The Bank of Canada targets the 2% mid-point of a 1-3% inflation control range.

The bank believes the supply bottlenecks and shipping capacity shortages that have developed as economies around the world rebound from COVID-19 are temporary, Lane said.

"If those pressures on capacity actually persist, then we could actually see inflation above target in a more persistent manner," he said. "If that happens, of course it would have implications for our inflation outlook and for our monetary policy going forward."

In April, the bank said it expected economic slack to be absorbed in the second half of 2022, signaling it could start hiking rates that year.

Earlier, Lane told an audience of financial advisers that the bank now expects inflation to stay around 3% through the summer before then easing later in the year.

Lane said the central bank is looking at the possibility that some of the cost pressures on raw material are "feeding through into inflation" more than it has seen or is expecting.

"That is something we are of course keeping a close eye on," he said.

On the economic recovery, Lane said despite a harsh third wave of infections that led to more lockdowns and hit employment, recent data show signs of increasing resilience that bodes well for Canada's rebound.

The Canadian dollar was up 0.2% on the day, trading at about 1.2085 to the U.S. dollar, or 82.75 cents.

(Reporting by Julie Gordon and David Ljunggren in Ottawa, additional reporting by Fergal Smith in TorontoEditing by Marguerita Choy and Aurora Ellis)