February 26, 2015 / 1:38 PM / 3 years ago

UPDATE 2-Canada inflation hits more than 1-year low as gasoline falls

(Adds market reaction, analyst quotes)

OTTAWA, Feb 26 (Reuters) - Canada’s annual inflation rate cooled to a more than one-year low in January, weighed down by much cheaper gasoline, data from Statistics Canada showed on Thursday.

The annualized rate dropped to 1 percent last month from 1.5 percent in December. Still, that topped analysts’ forecasts for a decline to 0.7 percent while keeping inflation at the lower end of the Bank of Canada’s 1 percent to 3 percent target range.

January’s rate was the lowest since an annualized 0.9 percent in November 2013, Statistics Canada said.

Core inflation, which strips out volatile items and is closely watched by the Bank of Canada, suggested underlying inflation was not as muted, holding steady at 2.2 percent.

Gasoline prices slumped 26.9 percent in the 12 months leading up to January, steeper than December’s 16.6 percent drop. Prices in seven of the eight major components of the index were higher, led by more expensive food and shelter costs.

“The dramatic weakening of the Canadian dollar has lifted all kinds of other prices outside of gasoline,” said Doug Porter, chief economist at BMO Capital Markets in Toronto, “and this likely does mark the low for Canadian inflation.”

The Bank of Canada unexpectedly cut interest rates to 0.75 percent in January, citing a threat to economic growth and its inflation targets from the dramatic drop in oil prices.

Investors are pricing in a less than 30 percent probability that the bank will lower rates again when it meets next week. This sharp reversal in expectations came after comments from Governor Stephen Poloz earlier this week were taken as a hint that the central bank will stand pat.

“I would say that these numbers would just reinforce that view, that the Bank of Canada can afford to wait a little bit,” said Porter.

The Canadian dollar weakened following the report and was most recently trading at C$1.2497, or 80.02 U.S. cents, lower than the previous day’s close of C$1.2423, or 80.50 cents. Investors were also taking in data that showed a rise in U.S. durable goods orders, which boosted the U.S. dollar.

Overall inflation fell 0.2 percent from December, while core inflation rose 0.2 percent. (Reporting by Leah Schnurr; Additional reporting by Allison Martell in Toronto; Editing by Lisa Von Ahn)

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