April 17, 2008 / 11:10 AM / in 10 years

Inflation dodges global woes

OTTAWA (Reuters) - Canada’s core inflation rate slowed in March to its lowest since July 2005, giving the Bank of Canada plenty of room to slash interest rates to shore up the economy against fallout from a possible U.S. recession.

<p>Newly pressed loonies at the Royal Canadian Mint in Winnipeg on November 14, 2007. REUTERS/Fred Greenslade</p>

The figures, released by Statistics Canada on Thursday, showed the Canadian economy remains surprisingly shielded from the inflation concerns plaguing many other countries.

Core inflation -- which excludes volatile items like gasoline and is therefore the central bank’s most reliable gage of price growth -- dropped to 1.3 percent from 1.5 percent in the year to February, advancing just 0.2 percent on the month.

Overall inflation fell to 1.4 percent in March from 1.8 percent in February, its lowest since January 2007 due to lower car prices and less upward pressure from gasoline compared with a year ago. The monthly rise in the all-items consumer price index was 0.4 percent.

“The rest of the world is seeing inflation and Canada is seeing disinflation, which is quite remarkable, but understandable given the mix of factors going on within Canada ranging from the stronger Canadian dollar to the battle of wills being conducted through the retail sector,” said Stewart hall, market strategist at HSBC Canada.

In the euro zone, inflation pushed to a new high of 3.6 percent in the year to March and U.S. consumer prices jumped by 4 percent in the same period.

The Canadian dollar dipped as low as C$1.0056 to the U.S. dollar, or 99.44 U.S. cents, from C$1.0032 to the U.S. dollar or 99.68 U.S. cents. It then pulled back to C$1.0005.

Analysts surveyed by Reuters had forecast, on average, total inflation of 1.5 percent and core inflation of 1.4 percent.

STEEP RATE CUT SEEN

The inflation numbers cemented market expectations that the Bank of Canada would opt for a 50 basis-point cut to the overnight rate when it sets rates next Tuesday.

“It seems like there is a bit of a divergence in Canada and the U.S. and it seems like there is less likelihood of 50 basis points out of the U.S. and more likelihood of 50 out of Canada,” said David Bradley, director of foreign exchange at Scotia Capital.

The bank has already reduced its lending target by one percentage point since December and signaled more to come as it frets about the U.S. economy. Canada’s overnight rate is 3.5 percent, compared to the Fed funds rate of 2.25 percent.

But signs of red-hot Canadian consumer spending and a tight labor market could mean a limited easing cycle in Canada.

Bank of Canada Governor Mark Carney said in a television interview this week that the bank would also take into account “a variety of strengths” in the economy.

The strong Canadian dollar has cheapened imports and put pressure on retailers, especially car dealers, to slash prices to lure back shoppers who sought better deals in the United States. Prices for vehicles and leasing fell 7.1 percent in March year-on-year.

Statscan said an 8.3 percent rise in mortgage interest costs was the main upward pressure on prices in the year to March.

Gasoline prices grew at a slower pace year-on-year than in February, but they were still the second biggest contributor to March inflation with a 7.9 percent increase. The price of fuel oil and other fuels jumped 29.6 percent, the biggest spike since after Hurricane Katrina in 2005.

(Editing by Janet Guttsman)

Additional reporting by John McCrank in Toronto

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