Canada inflation eases, no pressure for rate hike

OTTAWA (Reuters) - Inflation in Canada eased in February, bucking the trend in many other countries and removing some pressure from the Bank of Canada to start raising interest rates again soon.

Statistics Canada said that core inflation, which excludes gasoline and other volatile items, slipped to 0.9 percent year-on-year in February. That was the lowest level since Statscan began recording 12-month rates in January 1985 and is explained mainly by a plunge in hotel rates compared with February 2010, when they spiked during the Winter Olympics in Vancouver.

Overall consumer prices rose 0.3 percent in the month, the same increase as the previous month, for a 2.2 percent annual inflation rate. That was down from 2.3 percent in January and just below the consensus forecast of 2.3 percent.

The docile price environment gives the central bank more reason to stay put on rates for now, but analysts said strong domestic growth and an expected easing of global tensions will eventually pressure prices and prompt a rate increase this year.

“I think that this is one month of low inflation at the core measure. It doesn’t change the world as we see it,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

“So we still think the bank will be back in rate-hike mode in the months ahead, but not April,” she said.

The Bank of Canada, which targets 2 percent inflation, has kept its benchmark rate on hold at 1.0 percent since September, pending more evidence of a sustained recovery.

Market players are divided in their views on the timing of the next hike. A Reuters poll in February showed they thought May 31 was the most likely bet, and that the bank was unlikely to move at its next decision date on April 12.

“If the bank is worried about global economic growth, (the inflation data) gives them a scope to pause,” said Sheryl King, chief economist in Canada at Banc of America Merrill Lynch.

“Rates are going to continue to rise. They may not rise as aggressively as I expected,” she said, adding that “markets (are) still probably underestimating how much policy normalization the bank has to do.”

HOLDING PATTERN

The Canadian dollar was little changed after the inflation data, holding at around C$0.9828 to the U.S. dollar, or $1.0175, while bond prices firmed.

Overnight index swaps, which trade based on expectations for the key central bank rate, showed traders have scaled back their bets for Bank of Canada rate hikes in the coming months. The Reuters calculation of the swaps shows traders see a 96.8 percent chance the bank will hold rates steady on April 12.

Gasoline and restaurant food costs were the biggest contributors to inflation in the year to February. They were partially offset by a sharp drop in traveler accommodation

The drop in hotel rates along with lower passenger vehicle prices explained the weak core inflation rate, Statscan said.

Large gains in food and energy costs have propelled global inflation rates higher for the past few months.

The Canadian figures contrast with data showing U.S. consumer prices increased at their fastest pace in more than 1-1/2 years in February and euro zone inflation jumped well above the European Central Bank’s target.