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.
The results suggest the surprising jump in the October inflation rate was an anomaly.
"Essentially what this report does is reverses any concern that may have built up a month ago," said Doug Porter, deputy chief economist at BMO Capital Markets.
The Bank of Canada kept interest rates on hold this month for the second consecutive time after raising borrowing costs three times between June and September. It sees fourth-quarter inflation averaging 2.1 percent, just a notch above its 2 percent target.
"If anything, today's report leaves them on track to possibly undershoot their call, which I don't think many would have dared look for after last month's report," Porter said.
Analysts surveyed by Reuters earlier this month predicted, on average, that the central bank would not hike rates again until the second quarter of next year.
Markets were pricing in a 89.7 percent probability of rates staying on hold in January, up slightly from 89.1 percent before the report, according to overnight index swaps tracked by Reuters.
Retail sales in October provided mixed signals on the mood of Canadian shoppers, who paced the economic turnaround a year ago. Sales jumped 0.8 percent in October, beating forecasts, but excluding the effects of a surge in gasoline prices, they slipped 0.1 percent.
Sales actually fell 0.2 percent volume terms, which could dampen monthly gross domestic product figures.
Derek Burleton, vice president and deputy chief economist at TD Economics, said he expects consumer spending to show resilience in the rest of the fourth quarter and expand by 3 percent, annualized. "This implies a good, but not great, holiday year for retailers, who continue to face intense price competition."
Worries about personal finances and a reluctance to spend on big-ticket items could spell continued slowdown in consumer spending. The Conference Board's consumer confidence index slipped 2.6 points in December to 81.The confidence index fell in seven out of 12 months this year.
Additional reporting by Howaida Sorour, Ka Yan Ng and John McCrank; editing by Jeffrey Benkoe and Peter Galloway