Canada inflation, spending data point to low rates

Tue Dec 21, 2010 11:18am EST
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By Louise Egan

OTTAWA (Reuters) - Canada's annual inflation rate eased in November from a two-year high the month before, likely to the relief of the Bank of Canada, which wants to keep interest rates low until economic recovery gains impetus.

The inflation report from Statistics Canada on Tuesday was followed by retail sales figures that showed consumers were keeping a lid on spending in October. Then came a Conference Board of Canada report that showed consumer confidence slipped in December to levels last seen a year ago.

The data's failure to show any reason to expect higher interest rates in Canada in the near future pushed the Canadian dollar as low as C$1.0207 to the U.S. dollar, or 97.97 U.S. cents, almost matching the near-three week low hit in the previous session. The currency subsequently bounced back a bit.

The reports portray an economy that is growing more slowly than in the first half of the year and is free of inflationary pressures, cementing the view that the Bank of Canada will leave its benchmark lending rate at 1 percent until the second quarter of 2011.

"As much as the market is scrambling and adjusting to the reality of softer inflation in November, the Bank of Canada is probably sitting there quite pleased with itself for not having hiked (rates) recently and for not projecting any intention either in the next little bit," said Eric Lascelles, chief macro strategist at TD Securities.

The consumer price index edged up 0.1 percent in November for an annual rate of 2 percent. That was down from 2.4 percent annual inflation in October and below the market forecast of 2.2 percent.

Statistics Canada attributed the year-over-year deceleration to energy, food and clothing prices.

The core inflation rate most closely watched by the Bank of Canada, which strips out energy and other volatile prices, was unchanged on the month and was up 1.4 percent on the year, compared with 1.8 percent in October.   Continued...