August 17, 2012 / 12:42 PM / 5 years ago

Canada inflation tamer in July on energy, clothing

OTTAWA (Reuters) - Canadian core and headline inflation were both tamer than expected in July, bolstering expectations the Bank of Canada will leave interest rates at near-record lows well into 2013.

Consumers paid less for clothing and fuels such as gasoline and natural gas in July than they did a year earlier, pushing the annual inflation rate down to 1.3 percent from 1.5 percent in June, Statistics Canada said on Friday.

The core inflation rate, which excludes gasoline and other volatile items, softened to 1.7 percent from 2 percent.

Canada’s economy is on track for modest growth this year, but the lack of inflationary pressure combined with global uncertainty means there is little pressure for the central bank to withdraw stimulus as it has pledged to do.

“It was really soft right across the board ... All in all, inflationary pressures in Canada appear well contained at this point,” said Camilla Sutton, chief currency strategist at Scotiabank.

Core inflation is below the central bank’s estimated 1.9 percent for the third quarter, noted Sal Guatieri, senior economist at BMO Capital Markets.

“It possibly pushes out Bank of Canada rate hike expectations, but no one expects the bank to raise rates anytime soon,” he said.

Analysts had expected overall inflation of 1.5 percent and core inflation of 2.0 percent, the same rates as in June.

On a monthly basis, the overall consumer price index and the core items both fell 0.1 percent.

NO RUSH ON RATE HIKES

The central bank, which targets 2 percent inflation, has been talking since April about hiking rates from their current 1.0 percent. But analysts are betting that it may wait as long as a year before making a move.

Traders slightly decreased their bets on a rate increase later this year after the data, according to overnight index swaps, which trade based on expectations for the policy rate.

The Canadian dollar weakened to a session low at C$0.9902 to the U.S. dollar, or $1.0099, from around C$0.9890, or 1.0111 immediately before the release.

Statscan said gasoline prices dropped 1.3 percent in the 12 months to July, natural gas prices fell 15.2 percent and clothing was down 2.8 percent. Upward pressure on prices came primarily from passenger vehicles, restaurant food, meat and electricity.

Analysts expect stronger price pressures to emerge in the next few quarters, particularly as the severe drought affecting the United States pushes up food prices.

Additional reporting by Alex Paterson, Alastair Sharp, Jon Cook and Solarina Ho; Editing by Chizu Nomiyama

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