By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -Bank of Canada Governor Tiff Macklem suggested April's inflation increase - the first in 10 months - was an anomaly and said consumer prices would continue to come down, prompting markets to pare expectations for another hike.
The central bank has been warning Canadians that rates could go higher. April's unexpected acceleration in inflation to 4.4% from 4.3% in March has some economists forecasting a hike later this year.
"Inflation has come down. It is coming down. We expect it will continue to come down," Macklem said when asked about the inflation figures published this week, adding that April inflation "did come in stronger than we expected."
Before Macklem spoke, money markets had seen an 80% chance for a hike in July. After, that dropped to 60%.
Earlier, the Bank of Canada said it was increasingly worried about the ability of households to pay off their debts and is seeing signs of financial stress among some home buyers.
The central bank hiked its key overnight rate by 425 basis points to 4.5% between March last year and January, posing a challenge for people who bought at rock bottom rates and now have to renew their mortgages.
The share of indebted households behind on payments for at least 60 days has been increasing since mid-2022 but remains below pre-pandemic levels, the bank said.
"In light of higher borrowing costs, the Bank of Canada is more concerned than it was last year about the ability of households to service their debt," it said in an annual report on the health of the financial system.
"While most households are proving resilient to increases in debt-servicing costs, early signs of financial stress are emerging," particularly among recent home buyers, according to the so-called Financial System Review.
About a third of mortgage holders saw an increase in payments compared with February 2022, just before borrowing costs started to rise.
By the end of 2026, almost all mortgage holders will face higher payments, the bank said, as homeowners renew deals.
"While the mortgage market will deliver a pretty stiff headwind in the years ahead, the impact is spread out over time," said Robert Kavcic, senior economist at BMO Capital Markets, in a note.