Bank of Canada says inflation surge temporary, neutral on rates

OTTAWA (Reuters) - Shrugging off a recent surge in inflation as temporary, the Bank of Canada held its overnight rate at 1 percent as expected on Wednesday and said it could just as easily cut rates as hike them.

In a nod to inflation that hit 2.3 percent in May and higher-than-expected core inflation, the central bank omitted language from its June rate statement which said the downside risks to its inflation outlook were as important as before.

It said the risk of a downward drift in inflation expectations has diminished with inflation now close to the 2 percent target. But its overall tenor was to emphasize excess capacity in the economy and the need for continued monetary policy stimulation.

"The bank does not expect the recent momentum in monthly inflation to persist," it said in its Monetary Policy Report. "The bank's judgment is that underlying inflation pressures remain muted, given the persistent slack in the economy and continued intense competition in the retail sector."

Demonstrating its disappointment over economic growth, it pushed back yet again, to mid-2016, its expectations for when the economy would reach full capacity and when core inflation would rise to the 2 percent target.

And it said that total inflation, which hit 2.3 percent in May, would dip back below 2 percent in the second quarter of 2015 and rise to the target only in the first quarter of 2016.

"The bank is neutral with respect to the timing and direction of the next change to the policy rate," it said.

(Reporting by Randall Palmer; Editing by David Ljunggren)