April 19, 2013 / 12:47 PM / 4 years ago

Drop in gasoline prices help keep Canada inflation benign

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Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007.Christinne Muschi

OTTAWA (Reuters) - Canada's annual inflation rate in March slowed to 1.0 percent from 1.2 percent in February, further underlining how little pressure there is on the Bank of Canada to raise rates any time soon.

The main reason for the drop in the annual rate was lower gas prices, Statistics Canada said on Friday. The March rate was slightly less than the 1.1 percent predicted by economists.

The Bank of Canada - which has kept its overnight lending rate at a near record low since September 2010 - this week said it did not expect inflation to hit its 2 percent target until mid-2015. The central bank is not expected to raise rates until the second half of 2014.

"After quite a bit of volatility in the prior few months, Canadian inflation has shown its true colors a little more clearly this month - and those colors are pretty bland," said Doug Porter, chief economist at BMO Capital Markets.

"Inflation, like growth, is at the very low end of what the Bank of Canada is comfortable with."

The Canadian economy is struggling to cope with weak foreign markets and a strong domestic dollar. The Bank of Canada central bank this week also cut its economic forecasts on signs of a slackening economy.

Gasoline prices in the year to March fell by 0.3 percent after rising 3.9 percent in the 12 months to February. Food prices grew by 1.8 percent in the year to March, down from the 1.9 percent recorded in February.

The Bank of Canada's closely watched core rate, which strips out volatile prices of energy and some foodstuffs, stayed unchanged at 1.4 percent.

"The key take-away here is that growth has disappointed, slack is quite material and that in turn will help keep inflation pressures very much benign over the next several quarters," said TD Securities macro strategist Mazen Issa."

After the figures were released the Canadian dollar remained steady at C$1.0260 to the U.S. dollar, or 97.47 U.S. cents. It later strengthened slightly and by 10:05 a.m. (1405 GMT) was at $1.0252, or 97.54 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 trimmed their very small bets on an interest rate cut later this year.

"Certainly these low inflation readings argue for the bank to keep policy highly accommodative, to try to get a bit more momentum into the economy," said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

Separately, Canadian wholesale trade unexpectedly remained flat in February from January, held back by lower sales of machinery, equipment and supplies.

Market operators had expected a 0.4 percent increase. Statscan revised January's advance to 0.5 percent from an initial 0.3 percent. The volume of sales remained stable.

In February there were decreases in five of the seven subsectors, representing about 70 percent of wholesale trade. Wholesalers in seven of Canada's 10 provinces reported higher sales, but these were offset by a 1.1 percent drop in Ontario, the largest province.

Additional reporting by Alastair Sharp, Euan Rocha, Andrea Hopkins and Solarina Ho in Toronto; Editing by Kenneth Barry

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