October 12, 2012 / 8:43 PM / 5 years ago

Canada inflation seen tame, little rate hike pressure

TORONTO (Reuters) - Canada’s headline inflation rate likely picked up slightly in September, while still keeping well below the Bank of Canada’s target, making it unlikely the central bank will resume tightening monetary policy anytime soon.

The median forecast in a Reuters poll is for the consumer price index to edge up to an annual rate of 1.3 percent in September, up from 1.2 percent in August.

But the closely-watched core index, which excludes gasoline and other volatile items, is expected to come in at an annual rate of 1.4 percent, down from 1.6 percent in August.

“We’re anticipating yet another month of sluggish price growth, with the only stand out gainer being gasoline prices, which certainly did their part to lighten consumers’ wallets in the month,” analysts at IHS Global Insight wrote in a note, adding that food prices likely crept up marginally.

Capital Economics’ David Madani said that with the exception of food and possibly health and personal care, inflation across most other sub-categories was most likely below 2 percent, with clothing price inflation “submerged in the negative.”

Both inflation measures remain well below the Bank of Canada’s 2 percent target, indicating slack demand and providing little justification for tighter policy.

“I think that just further drives home the point that the Bank is going to be in zero rush to raise interest rates,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “The debate now seems to be more whether they will retain their very mild tightening bias.”

Unlike the central banks of many other developed economies, the Bank of Canada has been indicating since April that it will look to raise the cost of borrowing once broader economic conditions allow.

But recent Reuters polls and yields on overnight index swaps, which trade based on expectations for the policy rate, suggest investors see little probability of a rate increase until at least late next year.

Inflation in Canada, a resource exporting economy, has been limited by strength in the country’s currency, which hit a 13-month high in September after the U.S. Federal Reserve announced its third round of aggressive stimulus measures.

“Looking ahead, with the sluggish global economy threatening to drag down commodity prices and Canada’s housing market self-correcting, GDP growth is likely to remain below potential growth this year and next, adding further to disinflationary pressures,” Capital Economics’ Madani wrote.

Polling by Teresa Ruiz. Editing by Jeffrey Hodgson and Andre Grenon

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