OTTAWA (Reuters) - Canada's annual inflation rate slowed more than expected in February to 1.2 percent on falling gasoline and car prices, but the core rate closely watched by the central bank rose to 2 percent.
The data, released by Statistics Canada on Friday, did little to change expectations that the Bank of Canada will soon start taking additional measures beyond interest rate cuts to stimulate the sagging economy.
The Canadian dollar was slightly weaker at C$1.2104 to the U.S. dollar, compared with around C$1.2095 before the data.
The consumer price index climbed 0.2 percent in the month while the core index, which excludes volatile items and is a better gauge of underlying price trends, rose 0.3 percent.
"A little bit faster on the core side, I thought there would be more dampening pressure," said Michael Gregory, senior economist at BMO Capital Markets.
Analysts in a Reuters poll had expected a 0.3 percent rise in CPI in March and a 0.2 percent rise in core CPI.
In the 12-month period, consumers faced rising prices for food and shelter costs but those were partially offset by a decline in transportation costs, most notably for gasoline and the leasing and purchase of passenger vehicles.
Inflation in the first quarter was in line with the Bank of Canada's projection of 1.2 percent.
The report is the last key piece of data for the bank as it prepares for an interest rate decision next Tuesday, followed by a report on Thursday outlining nonconventional steps it might take in coming months.
Any such nonconventional measures would be more likely if the bank saw inflation falling consistently below its 2 percent target.
"We are still averaging below where (the Bank of Canada) thought we would be so perfectly consistent with them continuing to lean toward more monetary stimulus," said Gregory.
Economists and business managers have said they don't expect any lingering price pressures to last long as the economic recession is not yet fully reflected in living costs.
Details of the report suggested seasonal factors kept inflation artificially high in March, analysts said. The seasonally-adjusted CPI fell 0.3 percent on the month.
Paul Ferley, assistant chief economist with the Royal Bank of Canada, said he expects continuing weakness in growth, not inflation, to be the main focus of the Bank of Canada.
The central bank has already reduced its overnight lending target by 4 percentage points to a record low of 0.5 percent.
A Reuters poll on Thursday showed 8 of 12 Canadian primary securities dealers expect the bank to hold rates unchanged on Tuesday while three expected a quarter-point rate cut.
Regardless of the rate decision, 10 of the dealers expected it to make a move into so-called "quantitative easing" within the next three months.
That could involve a range of measures such as expanding the money supply to purchase government bonds in order to lower longer-term interest rates, making targeted purchases of private sector securities or expanding its existing liquidity facilities.
In January, the bank projected year-on-year prices would fall in the second and third quarters, rising through 2010 an reaching the 2 percent target in early 2011.
It will provide updated forecasts next week along with its framework for credit and quantitative easing.
(Additional reporting by Frank Pingue and Scott Anderson in Toronto)
Editing by Theodore d'Afflisio