September 21, 2012 / 12:37 PM / 5 years ago

Tame Canadian data shows little rate hike pressure

OTTAWA (Reuters) - Tame Canadian inflation in August and weak wholesale sales data for July both show there is no real pressure on the Bank of Canada to start raising interest rates from near-record lows, analysts said on Friday.

Statistics Canada said the annual inflation rate had dropped to 1.2 percent in August from 1.3 percent in July, well below the central bank's 2.0 percent target rate. Markets had expected a rate of 1.3 percent.

Statscan said there was in fact virtually no difference between the two months. The more accurate August figure of 1.24 percent was rounded down to 1.2 percent, while July's 1.25 percent had been rounded up to 1.3 percent.

"It just reinforces the message that inflation is just not a concern of the Bank of Canada at the moment, and likely will not be for some time, so the Bank of Canada can continue to hold interest rates," said Sal Guatieri, senior economist at BMO Capital Markets.

The central bank started signaling in April it might raise rates if the economy continued to grow at a reasonable rate.

Whether it can do so is increasingly in question. In another report released on Friday, July's wholesale trade dropped by 0.6 percent from June, greater than the 0.2 decline expected by markets.

PRESSURE FROM ABROAD

The reports were the latest in a string of releases which showed the Canadian economy is slowing down, hurt by the persistent economic problems in Europe and the United States.

David Watt, chief economist at HSBC Canada, said the wholesale numbers were very disappointing and suggested annualized GDP would come in closer to a sluggish 1 percent in the third quarter.

"There is more than enough evidence now that the Bank of Canada could further step back from its hawkish demeanor and turn to a more neutral tone given the current headwinds," he said.

The Bank of Canada's most recent projection, in July, is for annualized economic growth of 2.0 percent in the third quarter.

A Reuters poll of Canadian primary dealers taken earlier this month revealed that most expected the central bank to start raising rates again in the second half of 2013 or later. <CA/POLL>

CLOTHING COSTS FALL

The only major component in the consumer price index to drop in the 12 months to August was clothing and footwear, where prices fell by 1.2 percent on declines in prices of women's clothing. Energy prices rose 0.8 percent following three straight months of year-over-year falls.

"With growth expected to fall below trend in the second half of this year, the economy will tilt further into excess supply. This will help keep price pressures subdued and reduce the urgency for the Bank to tighten policy," TD Securities analyst Mazen Issa said in a note to clients.

The Bank of Canada's closely watched core inflation rate, which strips out the prices of items such as gasoline, tobacco and some foodstuffs, dropped to 1.6 percent from 1.7 percent in July. Markets had expected the rate to fall to 1.5 percent.

Canada's dollar held on to earlier gains following the data. It was trading around C$0.9763, or $1.0243 after closing at C$0.9765, or $1.0241 on Thursday. <CAD/>

With additional reporting by Solarina Ho, Julie Gordon and Andrea Hopkins in Toronto; Editing by Jeffrey Hodgson

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