February 27, 2019 / 1:38 PM / a year ago

UPDATE 2-Canada's inflation rate drops on lower gasoline prices

(Adds analyst comments, dollar reaction, details)

By Julie Gordon

OTTAWA, Feb 27 (Reuters) - Lower gasoline prices pulled Canada’s annual inflation rate in January down to 1.4 percent from 2.0 percent in December, reinforcing market expectations that imminent interest rate hikes are off the table.

Analysts in a Reuters poll had forecast the rate would be 1.5 percent. January marks the second time in the last 12 months that the rate has slipped below the Bank of Canada’s 2.0 percent target.

The central bank has raised rates five times since July 2017, though Governor Stephen Poloz indicated last week that while interest rates need to move up into a neutral range, he was in no rush to resume monetary tightening.

“With the core measure of inflation within the central bank’s range, the Bank of Canada is likely to remain on the sidelines and continue to monitor the data,” said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

The bank is due to announce its next interest rate decision on March 6 and analysts largely expect no change.

Energy costs declined 6.9 percent in January from the previous year, driven by a 14.2 percent plunge in gasoline prices. That helped drive the transportation component down 0.4 percent, its first 12-month decline since July 2016, Statistics Canada said on Wednesday.

“I think the big story is we’re seeing the late 2018 slide in oil prices fully show up in the headline inflation,” said Doug Porter, chief economist at BMO Capital Markets.

Adjusted to remove gasoline, the annual inflation rate was 2.1 percent.

Service costs were up 2.7 percent, though down from 3.5 percent in December as transitory pressures eased, Statistics Canada said. Month-to-month decreases in air transportation and travel tours followed the end of the holiday travel season.

The Bank of Canada’s three core inflation measures were unchanged, with CPI common, which the bank says is the best gauge of the economy’s underperformance, at 1.9 percent.

The Canadian dollar pared gains on the news, touching C$1.3152 to the U.S. dollar.

Reporting by Julie Gordon in Ottawa, additional reporting by Dale Smith in Ottawa, Fergal Smith and Susan Taylor in Toronto; Editing by Bernadette Baum and David Gregorio

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