Bank of Canada says strong demand risks higher inflation

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) - The Bank of Canada on Tuesday said if domestic demand was allowed to get too far ahead of supply, it could risk further boosting inflation, which is already at a 31-year high and more than three times the bank's target.

Senior Deputy Governor Carolyn Rogers (NYSE:ROG), in her first speech since joining the governing council in December, said interest rates would need to move higher. Her remarks did not refer to the bank possibly needing to act "forcefully", a phrase central bank officials have used in recent appearances.

"With the Canadian economy starting to overheat, we can't let demand get too far ahead of supply or we risk adding further to inflation," she told a women's business group in Toronto.

Rogers acknowledged interest rates remain low, despite the Bank of Canada making a rare 50 basis point (bps) increase last month to 1%, but reiterated they needed to go higher.

"Raising the policy rate will help moderate spending and rein in inflation," she said, adding the central bank is "committed to getting inflation back to target."

Rogers pointed to global supply chain bottlenecks and high commodity prices as the main drivers pushing Canada's inflation rate "close to 7%," well above the Bank of Canada's 1-3% control rate and 2% target.

Canadians are also spending more, business investment and exports are picking up, and unemployment is at a record low forcing employers to compete for workers, which will likely lead to wage inflation, she added.

The Canadian dollar was trading 0.2% higher at 1.2850 to the greenback, or 77.82 U.S. cents, as the greenback dipped against a basket of major currencies.

Money markets have fully priced in another 50 bps move at the Bank of Canada's next policy decision on June 1, with a 15% chance of a larger move.

Governor Tiff Macklem last week said Canada's economy was overheating, creating domestic inflationary pressures and reiterated higher rates were needed.

Inflation in Canada hit a 31-year high in March at 6.7%, amid broad price gains, it's 12th consecutive month above the central bank's 1-3% control range.