Canada defies global trend with tame inflation

Fri Feb 18, 2011 1:23pm EST
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By David Ljunggren

OTTAWA (Reuters) - Canada's annual inflation rate slipped to a relatively tame 2.3 percent in January as a strong currency helped it buck a global trend that has seen several major nations struggle to control rising prices.

January's rate, released by Statistics Canada on Friday, matched analysts' forecasts and compares with a 2.4 percent rate in December.

The figures prompted traders to trim their bets on the likelihood of a near-term interest rate hike by the Bank of Canada, which targets 2 percent inflation.

The year-on-year core rate, which is closely watched by the central bank, slipped to 1.4 percent from 1.5 percent in December.

One of the reasons for the relatively subdued inflation rate was the strong Canadian dollar, which hit a near three-year high on Thursday against the U.S. dollar.

"Those calling for a spring (rate) hike just got dealt a blow with inflation that is going absolutely nowhere ... This suggests to me that the Bank of Canada's concerns about the Canadian dollar and its disinflationary influences are still fully operational in the Canadian economy," Scotia Capital's Derek Holt said.

Although the currency's strength helps keep prices under control, partly by reducing the cost of imported goods, the Bank of Canada frets it could also hurt the crucial export sector.

The Canadian dollar rose as high as C$0.9825 to the U.S. dollar, or $1.0178, just after the report. By 1230 p.m. (1730 GMT) it had slipped back to C$0.9834 to the U.S. dollar, or $1.0169.   Continued...