PREVIEW-Canada inflation seen at 1.9 pct in July

WHAT: Canada’s consumer price index for July

WHEN: Friday Aug. 20 at 7 a.m. (1100 GMT)

REUTERS FORECASTS July June Forecast

(ECONCA: ) range

Headline CPI m/m +0.6 pct -0.1 pct

Headline CPI yr/yr +1.9 pct +1.0 pct +1.1 pct

to +2.2 pct

Core CPI m/m +0.1 pct -0.1 pct

Core CPI yr/yr +1.8 pct +1.7 pct +1.6 pct to

+2.0 pct

For individual forecasts see: [ECI/CA]

FACTORS TO WATCH:

Both overall inflation and core CPI, which strips out
volatile items, are seen around the Bank of Canada’s 2 percent
target, suggesting that inflation is not an issue.

It is the last CPI report before the Bank of Canada’s
policy decision in September, where market pricing is split
between another rate hike or a pass after two increases.

Harmonized sales tax: A blended federal-provincial sales
tax was introduced in both Ontario and British Columbia in
July, and is likely the main reason behind the surge in the
headline expectations for the month because it affects some 17
percent of household goods and services. The HST in the two big
provinces could push inflation above the Bank of Canada’s 2
percent target, but the central bank has said it will look
through this effect.

Core inflation: Markets will watch for signs core inflation
is tipping higher than expected, which could prompt the central
bank to speed up the pace of interest rate increases. The bank
targets 2 percent inflation but watches the core rate, which
excludes gasoline and some other volatile items, as a more
reliable gauge of underlying price trends.

Energy prices: Higher gasoline prices are expected to have
put upward pressure on inflation after they had moderated in
June from May. That had helped slow Canada’s annual inflation
rate in the last report.
(Graphic: http://link.reuters.com/nuh39m)

MARKET IMPACT: A firmer read on inflation could argue for
continued interest rate increases, and would likely push the
Canadian dollar (CAD=D4: ) higher. Government bond prices could
fall as expectations of more rate hikes become cemented.

A tame report could allow the Bank of Canada to stand pat
on rates, as it has also pointed to risks abroad that could
affect the economic recovery. Some domestic economic data has
pointed to a less dramatic pace of growth than was seen in the
first quarter.

Central bank Governor Mark Carney has repeatedly held that
monetary policy is not “preordained,” and has noted that the
global recovery is “proceeding but is not yet
self-sustaining.”

Market expectations, as measured by yields on overnight
index swaps, are leaning towards no change in interest rates at
the next monetary policy setting on Sept. 8, with probability
at about 53 percent.

The Bank of Canada has increased its benchmark overnight
rate by a quarter-point at each of its past two decisions,
bringing it to 0.75 percent.
(Reporting by Ka Yan Ng; editing by Rob Wilson)

PREVIEW-Canada inflation seen at 1.9 pct in July