2018.04.2220:11:00UTC+00Canada Inflation Disappoints Markets, Poloz Not Worried

Canada's annual inflation rate increased less than expected in March and February retail sales showed signs of weakness, which disappointed markets. Nonetheless, Bank of Canada Governor Stephen Poloz said he's not worried about inflation temporarily rising above the 2 percent target this year.

According to Statistics Canada, the annual rate had increased to 2.3 percent from 2.2 percent in February, the second consecutive month it surpassed the central bank's 2.0 percent target.

Poloz is maintaining an optimistic outlook, even with inflation expected to reach the highest levels in seven years, mostly because he believes the drivers are temporary. The central bank expects gains in the consumer price index to average 2.3 percent this year, before returning to near the bank's 2 percent target in 2019.

At a rate decision Wednesday where he kept his benchmark interest rate on hold at 1.25 percent, Poloz highlighted the central bank's range framework for inflation.

The Bank of Canada has hiked interest rates three times since July 2017 amid a strengthening economy and near record low unemployment, and markets largely expect a hike by this July.

The main contributor to the higher annual inflation rate in March was a 17.1 percent rise in gasoline prices. Seven of the eight major components increased on a year-over-year basis.

The Bank of Canada's three measures of core inflation were little changed. CPI common, which the central bank says is the best gauge of the economy's underperformance, stood at 1.9 percent.

CPI median, which shows the median inflation rate across CPI components, remains at 2.1 percent, while CPI trim, which excludes upside and downside outliers, fell to 2.0 percent from 2.1 percent.