* Inflation rate jumps, nears central bank target
* C$ rises after data, but down from previous close
* Bond prices down, digesting CPI and higher stocks
By Ka Yan Ng
TORONTO, Feb 18 (Reuters) - The Canadian dollar rose against the U.S. dollar on Thursday after data showed inflation in the country rose slightly higher than expected, encouraging talk about early interest rate hikes.
Canada's annual inflation rate in January jumped to 1.9 percent from 1.3 percent in December on higher gasoline and car prices, Statistics Canada said. Expectations had been for a year-on-year reading of 1.8 percent. [ID:nN18179821]
"CPI was a little bit firmer than expected. It's one of those things that will get people talking about what is going to happen to the Bank of Canada," said David Watt, senior currency strategist at RBC Capital Markets.
He said he didn't expect the the Bank of Canada would react to the higher-than-expected figures even as they neared the Bank of Canada's target, the midpoint of a 1-3 percent range.
The Bank of Canada has pledged to hold its key interest rate unchanged until the end of June as long as inflation stays in check.
The firmer-than-expected CPI number on Thursday prompted talk the central bank could break that conditional promise, although analysts said the inflation figures should smooth out in the coming months as the base effects of low fuel prices a year earlier which could fall out of the equation by mid-2010.
The Canadian dollar CAD=D4 rose as high as C$1.0441 to the U.S. dollar, or 95.78 U.S. cents from C$1.0466 to the U.S. dollar, or 95.55 U.S. cents, ahead of the data.
At 7:55 a.m. (1255 GMT), the Canadian dollar was at C$1.0457 to the U.S. dollar, or 95.63 U.S. cents, down a touch from Wednesday's close at C$1.0452, or 95.68 U.S. cents.
It was much softer overnight, extending Wednesday's decline as the greenback received a boost from upbeat U.S. housing data and U.S. Federal Reserve minutes, while euro zone woes weighed on riskier currencies.
Meanwhile, Canadian bonds were slightly lower after the CPI figures as they approached the Bank of Canada's target, while also under pressure because of stronger equity markets.
"The bond market will not like this number because the 2 percent is a sensitive number," said Benjamin Tal, senior economist at CIBC World Markets. "The minute we touch this number, the bond market gets nervous."
The two-year Canadian government bond CA2YT=RR was down 3 Canadian cents at C$100.29 to yield 1.354 percent, while the 10-year bond CA10YT=RR fell 12 Canadian cents to C$102.06 to yield 3.488 percent.
(Additional reporting by Scott Anderson) (Editing by Theodore d'Afflisio)