Canada December inflation holds at three-year low of 0.8 percent

Fri Jan 25, 2013 10:06am EST
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By David Ljunggren

OTTAWA (Reuters) - Canada's annual inflation rate in December remained at a three-year low of 0.8 percent, emphasizing how little pressure there is on the Bank of Canada to raise interest rates, Statistics Canada data indicated on Friday.

The rate is the lowest since 0.1 percent recorded in October 2009 and is far below the Bank of Canada's 2.0 percent target. Market analysts had expected the annual rate to increase to 1.2 percent from November's 0.8 percent.

"I think it just reinforces the view that the Bank is locked on the sidelines for a lengthy spell here," said Doug Porter, deputy chief economist at BMO Capital Markets.

Consumer prices in December fell by 0.6 percent from November, which Porter attributed to seasonal discounting and lower prices for gasoline.

The Bank of Canada on Wednesday cited soft inflation as one of the reasons why a rate hike would be less imminent than it has previously anticipated. A Reuters poll conducted later the same day showed most of Canada's primary dealers expect the next rate hike in the first quarter of 2014.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders decreased their already small bets on a rate hike in late 2013.

The central bank said in a statement on Wednesday that total and core inflation should return to its 2 percent target in the second half of next year, not the end of this year as it once thought.

The statement "was a bit of a surprise for the market, given that they had that dovish tone, so certainly the bank has been a little bit vindicated in that case," said TD securities strategist Mazen Issa.   Continued...