January 18, 2019 / 4:26 PM / in a year

WRAPUP 2-Canada inflation rate jumps in Dec but central bank seen on rate hold

 (Adds details on Canada's bond market)
    By Fergal Smith and Dale Smith
    TORONTO/OTTAWA, Jan 18 (Reuters) - Canada's annual inflation
rate climbed in December, matching the Bank of Canada's 2
percent target, but stable underlying price pressures were set
to forestall additional interest rate hikes over the coming
months as lower oil prices hurt the economy.
    Economists said the impact on the index of a 22 percent jump
in airfares will be temporary and that the Bank of Canada, which
has hiked interest rates five times since July 2017, will pay
more attention to its three measures of core inflation. They
were stable and held below the central bank's target.
    "There is no urgency whatsoever for the bank to move," said
Doug Porter, chief economist at BMO Capital Markets. "We've been
looking for two rate hikes later this year, and I stress the
word 'later.' We've got them going in July and December."
    Last week, the Bank of Canada held rates steady at 1.75
percent, as expected, but said more increases would be necessary
even though low oil prices        and a weak housing market will
harm the economy in the short term.
    Canada is a major exporter of oil, which has fallen as much
as 45 percent since October.      
    The Canadian economy is clawing its way through a soft
patch, which will delay the next interest rate hike until at
least April, according to economists polled by Reuters.
    The chances of another rate hike by April held at less than
20 percent after the inflation data, the overnight index swaps
market indicated.              
    Canada's annual inflation rate rose to 2.0 percent from 1.7
percent in November as rising air transportation and telephone
service costs offset lower energy prices, Statistics Canada said
on Friday. The median prediction of analysts was for annual
inflation of 1.7 percent.
    "I wouldn't read too much into it," said Andrew Kelvin,
senior rates strategist at TD Securities. "There was a big boost
from air travel again, so that's something we would expect to
unwind in the coming months. What's more important is that the
core inflation metrics were stable and we did have a bit of a
downward revision to the median core CPI metric."
    The CPI-median was unchanged at 1.8 percent after a downward
revision in November, which had previously been 1.9 percent. The
Bank of Canada's two other preferred measures of core inflation,
CPI-common and CPI-trim, were stable at 1.9 percent.
    The Canadian dollar          got a small boost from the
data, climbing to a session high of 1.3232 to the greenback, or
75.57 U.S. cents, before paring gains. It was last at about
1.3250, up 0.2 percent.
    Canada's 10-year             yield rose 4 basis points to
2.04 percent, its highest in one month, as investors piled back
into stocks on hopes Washington and Beijing are moving to end
their trade dispute.             
    Separately, Statistics Canada said foreign investors bought
C$9.5 billion ($7.2 billion) in Canadian securities in November,
mainly in bonds. Meanwhile, Canadian investors sold C$4.1
billion worth in foreign securities, led by U.S. shares. This
was the largest divestment in a year.                 
  ($1 = 1.3247 Canadian dollars)

 (Reporting by Dale Smith in Ottawa and Fergal Smith, Nichola
Saminather and John Tilak in Toronto; Editing by Susan Thomas
and Jeffrey Benkoe)
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