January inflation slows, rate cuts on horizon

Tue Feb 19, 2008 1:46pm EST
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By Louise Egan

OTTAWA (Reuters) - Canada's inflation rate slowed in January as discounts on vehicle prices offset gasoline price hikes, Statistics Canada said on Tuesday in a report that seemed to leave no obstacles in the Bank of Canada's path as it prepares to cut interest rates in March.

Statistics Canada also reported on Tuesday that wholesale trade in December fell 2.9 percent, citing weakness in the auto sector, which is highly vulnerable to the U.S. slowdown.

The two reports provide fodder for the view that the central bank may cut rates by half a percentage point on March 4 to fortify Canada's economy against fallout from a possible U.S. recession.

"It does open the door for something a little more aggressive than 25 (basis point rate cut), maybe even toward the 50 (basis points) that we're looking for," said Craig Wright, chief economist at Royal Bank of Canada.

Canada has none of the inflation concerns plaguing the United States or Europe. Its annual inflation rate slowed in January to 2.2 percent from 2.4 percent in December, less than half the U.S. inflation rate in November. A cut in the federal sales tax and a strong currency brought some price decreases, especially for vehicles.

The core inflation rate, which ignores tax changes and volatile items like gasoline, fell to 1.4 percent, its lowest since July 2005.

"The core (inflation rate) is nicely below the Bank of Canada's worry level. It points to a path of rate cuts coming up for the Bank of Canada," said Steve Butler, director of foreign exchange at Scotia Capital.

The bank targets core inflation of 2 percent.   Continued...