July 22, 2016 / 12:42 PM / a year ago

Canada June inflation stays tame, central bank seen on sidelines

OTTAWA (Reuters) - Canada’s annual inflation rate held at a relatively tame 1.5 percent in June, Statistics Canada said on Friday, which analysts said would reinforce the likelihood the Bank of Canada keeps interest rates on hold.

Products are displayed for sale inside a Target store in Delta, British Columbia January 15, 2015. REUTERS/Ben Nelms

The central bank - which cut rates twice last year to counter the effect of low oil prices - has a 2.0 percent target for overall inflation, a level last seen in January this year.

“I would say the Bank is firmly on hold. They would need a shocking set of numbers to really get them off the sidelines and I wouldn’t say this is shocking,” said BMO Capital Markets Chief Economist Doug Porter.

A Reuters poll on July 7 found markets expected the bank to keep rates unchanged for at least another year. Its next scheduled rate announcement is on Sept 7.

Analysts polled by Reuters had expected the annual inflation rate to slip to 1.4 percent.

Separately, Statscan said Canadian retail sales rose by 0.2 percent in May from April to hit a record C$44.28 billion ($33.80 billion), largely because of increases for food, drink and gasoline.

The Canadian dollar strengthened after the reports, hitting C$1.3065 to the U.S. dollar, or 76.54 U.S. cents. It closed at 76.42 U.S. cents on Thursday.

The inflation data showed prices rose in all major components in the 12 months to June, with the shelter index posting a 1.6 percent gain and food prices rising by 1.3 percent.

The core inflation rate, which strips out the prices of some volatile items and is closely watched by the central bank, remained at 2.1 percent.

The bank said on July 13 that total inflation was on track to return to 2 percent in 2017.

The retail sales gain, the fourth in five months, contrasted with a forecast of no growth in a Reuters poll. The previous record was the revised C$44.21 billion reported for April.

Sales dropped by 0.4 percent in Alberta on declines at new car dealers, the main retail store type affected by a major wildfire that forced the evacuation of the oil sands hub of Fort McMurray.

David Tulk, chief Canada macro strategist at TD Securities, said the Bank of Canada would most likely be comforted by the retail numbers. The fact overall sales rose despite the fire “shows that there was probably more resilience in other parts of the country to make up for that fact.”

Additional reporting by Allison Martell and Susan Taylor in Toronto; Editing by Jeffrey Hodgson

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