January 25, 2011 / 12:10 PM / 7 years ago

Inflation softer than expected in December

OTTAWA (Reuters) - Canada’s annual inflation rate rose less than expected in December despite pressure from rising energy prices, underscoring the view that the central bank will hold interest rates steady in the near term.

A rise in gasoline prices pushed Canada’s annual headline inflation rate up to 2.4 percent after a 2 percent rise the month before, Statistics Canada said on Tuesday. December’s consumer price index was unchanged on a month-on-month basis.

The increase on a annual basis was slightly below the market forecast of 2.5 percent. Traders reacted by pushing the Canadian dollar to a session low and driving money market and bond yields lower.

Currencies usually weaken on the prospect of soft interest rates as higher rates in other countries attract capital flows.

“It basically argues that inflation isn’t getting out of hand, we don’t have broad based price pressures ... and that implies the Bank of Canada doesn’t have to be in a rush to raise interest rates,” said Craig Alexander, chief economist at Toronto-Dominion Bank.

December’s core inflation rate -- which strips out gasoline and other volatile prices and is watched closely by the Bank of Canada -- showed prices retreated 0.3 percent from a month earlier. Core prices edged up to 1.5 percent on the year compared with a 1.4 percent rise in November.

“The key point here is that the big improvement, or moderation in core inflation that we saw in November, largely stuck in December. So we are starting 2011 with quite muted inflation trends,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“It looks like the Bank of Canada’s call for 1.4 percent average core inflation read in the first quarter is quite doable.”

The tame inflation data in Canada and other developed economies contrasts sharply with rising prices in many emerging markets.

The International Monetary Fund warned on Tuesday that inflation pressures may force a number of emerging economies to raise borrowing costs. And India’s central bank said inflation may stay high for longer than anticipated due to a rise in global commodities prices.

As well, the IMF scaled back its forecast for Canadian economic growth in 2011 to 2.3 percent from 2.7 pct, bringing it more into line with a recent Bank of Canada forecast.


Separately, the Conference Board of Canada said consumer confidence rose in January with Canadians more optimistic about jobs, personal finances, and their ability to make a major purchase.

The central bank has repeatedly warned Canadians against using low interest rates as a reason to take on too much debt, saying that rates that will eventually have to rise.

The Canadian dollar slumped to a low of C$1.0005 to the U.S. dollar, or 99.95 U.S. cents shortly after the inflation report, down from around C$0.9969 to the U.S. dollar, or $1.0031 immediately before the release.

The December inflation figures support the view that the Bank of Canada, which targets an inflation rate of 2 percent, will continue to hold rates steady well into 2011. The bank kept its key rate target on hold at 1 percent this month, though analysts expect it to begin raising rates again by mid-year.

Overnight index swaps, which trade based on expectations for the key central bank rate, showed investors see a 96.54 percent probability that the bank will keep rates on hold on March 1, its next policy announcement date, compared with 93.41 percent before the data.

As well as higher gasoline prices, energy costs rose overall in December, Statistics Canada said. The gains were offset by lower costs for clothing and footwear.

“One could speculate that the strength in the Canadian dollar is getting passed along to some extent, because a lot of the clothing and footwear that Canada sells is imported,” said Toronto-Dominion’s Alexander.

With additional reporting by Howaida Sorour in Ottawa and Euan Rocha and Solarina Ho in Toronto; editing by Peter Galloway

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