October 19, 2012 / 12:42 PM / in 5 years

Tame Canada inflation sets stage for central bank shift

OTTAWA (Reuters) - Canadian inflation remained tame in September at 1.2 percent, unchanged from August and provided little justification for the Bank of Canada to maintain a hawkish bias when it sets interest rates next Tuesday.

Core inflation, which excludes gasoline and other items so that underlying price pressures can be revealed, was at its lowest level in more than a year at 1.3 percent, down from 1.6 percent in August, according to a Statistics Canada report on Friday.

With inflation at, or below, the central bank’s 2 percent target since March, price pressures are the least of Canadian policymakers’ worries as economic growth slows and personal debt soars.

“(The data) shows (an) almost complete absence of inflation pressure in Canada’s economy. Wage growth is moderate, the strong Canadian dollar is dampening import costs, and retailers are challenged by cross-border shopping,” said Sal Guatieri, senior economist at BMO Capital Markets.

Food prices fell at the fastest rate since 1991 in September from August, and showed a more modest 12-month gain than in August. Car price increases also slowed in the year, offsetting sharp rises in gasoline and electricity costs.

The Bank of Canada has been alone among major Western central banks in telegraphing its desire to raise rates rather than lower them, and has done so since April. But a majority of analysts in a Reuters poll this week predicted it would soften its tone somewhat next week.

“I don’t think they’d think this move in the CPI is chronic, i.e. that we are in danger of going through 1 percent. But I think they will use it as a reason to move back to neutral,” said Mark Chandler, analyst at RBC Capital Markets.

The bank is seen holding its overnight target at 1.0 percent on Tuesday and it will likely revise down the growth and inflation projections in its economic outlook on Wednesday.

Market analysts had expected 1.3 percent overall inflation and a 1.5 percent core rate in September.

The Canadian dollar hit its weakest level against the U.S. currency since early September after the inflation data was released. It weakened at one point to C$0.9905, or $1.0096, from Thursday’s North American close of C$0.9849, or $1.0153.

The currency has fallen 1 percent so far this week after Bank of Canada Governor Mark Carney failed to mention an intention to raise rates in a speech on Monday.

Economists now forecast that the bank will not start to lift its benchmark interest rate from the current 1.0 percent until the fourth quarter of 2013.

Traders slightly increased bets on a rate cut in the coming year after the inflation data, according to overnight index swaps, which trade based on expectations for the central bank’s key policy rate.

The non-seasonally adjusted CPI climbed 0.2 percent in September, unchanged from August. The non-seasonally adjusted core CPI also rose 0.2 percent, compared with a 0.3 percent climb the previous month.

Additional reporting by Alex Paterson in Ottawa and Claire Sibonney, Andrea Hopkins and Alastair Sharp in Toronto; Editing by Chizu Nomiyama

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