January 24, 2014 / 1:44 PM / 4 years ago

UPDATE 2-Canada's inflation rate climbs; still below Bank of Canada target

3 Min Read

By David Ljunggren

OTTAWA, Jan 24 (Reuters) - Canada's annual inflation rate climbed to 1.2 percent in December from 0.9 percent in November, largely due to higher gasoline prices, but remained well below the Bank of Canada's 2.0 percent target, Statistics Canada data indicated on Friday.

Market operators had predicted a 1.3 percent inflation rate in December. The last time Canada saw 2.0 percent annual inflation was in April 2012.

Bank of Canada Governor Stephen Poloz said on Wednesday he was more worried about persistently low inflation than he had been three months ago. Market analysts said his comments paved the way for a possible interest rate cut if inflation and other data continued to disappoint.

The Bank this week predicted that inflation would remain at around 1.0 percent in the first half of the year and would not reach 2.0 percent for about two years.

"The bottom line is inflation remains very well in check, perhaps too much in check for the Bank of Canada's liking," said Sal Guatieri, senior economist at BMO Capital Markets.

"We believe inflation will drift modestly higher in coming months on the back of the weaker Canadian dollar and higher import costs and that will discourage the Bank from cutting interest rates," he told Reuters.

Fears about low inflation, the possibility of a rate cut and the struggling export sector have helped push the Canadian dollar down by more than 7 percent since last October.

Statscan said gas prices, which rose by 4.7 percent in the 12 months to December following a 0.4 percent gain in the year to November, largely were responsible for the increase in the overall inflation rate.

The Bank of Canada's closely watched annual core rate, which strips out the prices of volatile components such as gasoline and some foodstuffs, edged up to 1.3 percent in December from 1.1 percent in November.

The Bank - which aims to keep inflation at the mid-point of a 1.0 to 3.0 percent target range - has kept its key interest rate at a near-record low of 1.0 percent since September 2010.

"It (the inflation release) certainly doesn't mean that rate cuts are off the agenda but it probably doesn't make the potential for rate cuts any more likely than earlier in the week," said Shaun Osborne, chief currency strategist at TD Securities.

"Inflation is stuck at the low end of the Bank's target range. I think they're going to want to see how inflation pans out over the course of the next couple months, at least," he said.

In a Reuters poll last week, analysts predicted the bank's next rate move would be a hike, but not until the second quarter of 2015.

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