OTTAWA (Reuters) - Higher gasoline and food prices pushed up Canada's annual inflation rate a notch in February, but not high enough to cause the central bank major discomfort as it keeps interest rates near the record lows seen during the worst of the recession.
Annual inflation hit 2.6 percent in the month, up from 2.5 percent in January but slightly below the 2.7 percent rate forecast by analysts in a Reuters poll, according to Statistics Canada data on Friday.
Core inflation, which excludes eight volatile items including gasoline and some food, came in a little hotter than expected at 2.3 percent versus estimates of a 2.2 percent rate.
"There's a little bit more steam here in inflation than the Bank of Canada expected," said Doug Porter, deputy chief economist at BMO Capital Markets, referring to the core rate.
"Is it enough to change the landscape for the bank? I don't think so. But at the margin it is going to get a few more adherents to the view that bank could be hiking sooner rather than later," he said.
Traders continued to see a very slight chance of a rate hike in late 2012, although those bets did increase a bit after the inflation data. Market sentiment is reflected in overnight index swaps, which are priced based on expectations for the central bank's main policy rate.
Graphic on Canada inflation: link.reuters.com/rej37s
The Bank of Canada targets 2 percent inflation within a control range of 1 to 3 percent. Earlier this month, it noted that inflation had been slightly firmer than it had anticipated, suggesting it may feel pressured to lift its benchmark interest rate from the extremely low 1 percent.
Analysts surveyed by Reuters last month, prior to the bank's latest comments, predicted the bank would hold rates steady until the second quarter of next year. <CA/POLL>
Still, even with price pressures growing, not many are betting with confidence on a move this year.
"It sort of argues that at some point policy may need to be tightened, though I think that is still a ways off," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
On a monthly basis, the headline consumer price index climbed 0.4 percent, pressured mainly by gasoline and clothing. The core index also rose 0.4 percent, double the rate of the previous month, on higher vehicle insurance and homeowners' replacement costs.
Another measure of inflation excluding only food and energy came in at 0.3 percent in the month for a 1.7 percent annual rate.
In the year to February, gasoline prices jumped the most at 8.9 percent, followed by electricity which rose 8.7 percent and meat which increased 7.1 percent.
Since the global financial crisis hit, the central bank has signaled that it was willing to ignore temporary deviations in the inflation rate from its target due to the extraordinary pressures on the economy from abroad.
It may soon be ready to abandon that approach now that there are signs of a U.S. comeback and progress in resolving the European debt crisis.
The Canadian dollar softened shortly after the data to hit a March low of C$1.0033 versus the U.S. currency, or 99.67 U.S. cents.
The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate moves, rose to 1.244 percent from 1.24 percent just before the release.
With additional reporting by Claire Sibonney, Euan Rocha and Jon Cook; Editing by Jeffrey Hodgson