Canada January inflation slows, rate cuts expected

Fri Feb 20, 2009 11:52am EST
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By Louise Egan

OTTAWA (Reuters) - Canada's inflation rate softened more than expected in January, driving the Canadian dollar lower and spurring expectations that the central bank will cut interest rates aggressively next month.

A big drop in vehicle prices in January pushed consumer prices down by a sharper-than-expected 0.3 percent for an annual inflation rate of 1.1 percent, Statistics Canada said on Friday.

That is below the Bank of Canada's 2 percent target and down from 1.2 percent in December. The bank aims to keep inflation within a range of 1 percent to 3 percent.

The core rate, closely watched by the central bank because it excludes volatile items like gasoline, also fell more in January than forecast at 0.4 percent for an annual rate of 1.9 percent.

Analysts in a Reuters poll had forecast 0.1 percent declines in both the overall consumer price index and the core index in January.

"It was certainly weaker than anticipated ... I guess that is not too out of line with what's happening in our economy, which seems to be falling off a cliff pretty quickly," said Sal Guatieri, senior economist at BMO Nesbitt Burns.

"There will be more pressure on the Bank (of Canada) to cut interest rates in March," he said.

Following the data, the Canadian dollar fell to C$1.2635 to the U.S. dollar, or 79.15 U.S. cents, from Thursday's close of C$1.2593 to the U.S. dollar, or 79.41 U.S. cents. It later recovered a bit.   Continued...

<p>Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007. The Canadian dollar eased slightly against the U.S. dollar on Wednesday after breaching 99 U.S. cents overnight, as the hard-hit greenback recovered from Tuesday's U.S. interest rate cut and both Canadian and U.S. inflation reports came in below expectations. REUTERS/Christinne Muschi</p>