Canada April inflation well under forecast, Bank of Canada range

Fri May 17, 2013 9:44am EDT
 
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By Randall Palmer

OTTAWA (Reuters) - Cheaper gasoline and cars helped Canada's annual inflation rate fall dramatically in April to 0.4 percent from 1.0 percent in March - its lowest rate since 0.1 percent in October 2009, below expectations and well outside the Bank of Canada's target range of 1 to 3 percent.

The data released by Statistics Canada on Friday depressed the Canadian dollar sharply and boosted bond prices, as the market figured it made any interest rate by the Bank of Canada even less likely than before.

Prices fell by 0.2 percent on a monthly basis from March to April. Core inflation, excluding gasoline and other volatile items, dropped to 1.1 percent from 1.4 percent in March; on a monthly basis core prices rose 0.1 percent.

The Bank of Canada has insisted the next move in interest rates is likely up, but Friday's data showed how little pressure there is for higher rates. The central bank said last month it did not expect overall or core inflation to return to the 2 percent target before the mid-2015. April was the 12th consecutive month that inflation was below the target.

"The currency was vulnerable already heading into these numbers. It was clearly 'on its backfoot' in any event and to have a lower-than-expected reading on CPI (consumer price index) right across the board, it just knocked whatever support there was for the currency out from under it," BMO Capital Markets chief economist Doug Porter said.

"This is outside of its recent range. (The future direction) probably depends more on the broader U.S. dollar story, but at least for a spell we could be probing some new lows for the currency."

The Canadian dollar touched C$1.0308 versus the U.S. dollar, or 97.01 U.S. cents, after the figures were released, weaker than immediately before and also well below Thursday's finish at C$1.0192, or 98.12 U.S. cents.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the announcement traders cut their expectations of an interest rate increase later this year.   Continued...