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

Fri Jan 24, 2014 9:17am EST
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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.   Continued...