OTTAWA, May 18 (Reuters) - Canadian inflation cooled slightly in April, bolstering expectations the central bank will hold interest rates steady later this month and weakening the Canadian dollar.
The annual inflation rate was 2.2 percent, Statistics Canada said on Friday. That was slightly short of expectations for 2.3 percent, though still above the Bank of Canada’s 2 percent target.
Underlying inflation firmed as two out of three of the central bank’s core inflation measures rose, leaving them at an average 2 percent.
Separate data showed retail sales rose 0.6 percent in March, the biggest increase since October as consumers bought more cars.
The retail figures suggested March was shaping up to be a reasonable month for economic growth, said Avery Shenfeld, chief economist at CIBC Economics.
After a mediocre first quarter, that points to an economy “with enough momentum to leave Q2 looking bright enough for a Bank of Canada rate hike in July,” Shenfeld said.
The bank has hiked rates three times since last July. While policymakers are expected to hold rates steady when they meet later this month, markets see 36 percent odds of an increase, making for a sizeable minority view.
Still, that was down from 46 percent odds of a hike before the data.
“We ended Q1 very favorably and we’re going into a solid rebound into Q2 with core inflation hanging in at the Bank of Canada’s target,” said Derek Holt, vice president of capital markets economics at Scotiabank.
“To me, that’s good enough to go on rates. We’ll see whether or not they do on May 30, but I think they have the conditions to do so.”
The odds of the bank hiking in July are higher at 74 percent. The Canadian dollar weakened against the greenback, hitting a session low of C$1.2899 or 77.52 U.S. cents.
The bank has said it has some room to let the economy run without sparking excessive inflation pressures in the short-term.
A drop in the cost of travel services and a moderation in gasoline prices weighed on overall inflation, while higher costs for clothing and food helped to offset the softness elsewhere.
Among the core inflation measures, CPI common, which the central bank says is the best gauge of the economy’s underperformance, remained at 1.9 percent.
CPI median, which shows the median inflation rate across CPI components, and CPI trim, which excludes upside and downside outliers, both rose to 2.1 percent.
Additional reporting by Susan Taylor in Toronto Editing by Frances Kerry