February 18, 2011 / 12:07 PM / in 7 years

Canada defies global trend with tame inflation

OTTAWA (Reuters) - Canada’s annual inflation rate slipped to a relatively tame 2.3 percent in January as a strong currency helped it buck a global trend that has seen several major nations struggle to control rising prices.

January’s rate, released by Statistics Canada on Friday, matched analysts’ forecasts and compares with a 2.4 percent rate in December.

The figures prompted traders to trim their bets on the likelihood of a near-term interest rate hike by the Bank of Canada, which targets 2 percent inflation.

The year-on-year core rate, which is closely watched by the central bank, slipped to 1.4 percent from 1.5 percent in December.

One of the reasons for the relatively subdued inflation rate was the strong Canadian dollar, which hit a near three-year high on Thursday against the U.S. dollar.

“Those calling for a spring (rate) hike just got dealt a blow with inflation that is going absolutely nowhere ... This suggests to me that the Bank of Canada’s concerns about the Canadian dollar and its disinflationary influences are still fully operational in the Canadian economy,” Scotia Capital’s Derek Holt said.

Although the currency’s strength helps keep prices under control, partly by reducing the cost of imported goods, the Bank of Canada frets it could also hurt the crucial export sector.

The Canadian dollar rose as high as C$0.9825 to the U.S. dollar, or $1.0178, just after the report. By 1230 p.m. (1730 GMT) it had slipped back to C$0.9834 to the U.S. dollar, or $1.0169.

A Reuters survey of Canada’s 12 primary securities dealers taken after the inflation data was released showed no one expected the Bank of Canada to hike rates when it makes its next policy-setting announcement on March 1.

The survey also revealed that in the past month three of the dealers -- which work directly with the central bank as it carries out monetary policy -- had pushed back their forecast for the next rate hike. A third of dealers now expect this year’s first tightening will be in May.

“From the (Bank of Canada) standpoint, nothing was priced in anyways for the March meeting. Growth is likely in the near term to be more important to them than current inflation numbers,” said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.

Overall, prices in January were up by 0.3 percent from December. Energy prices rose 9.0 percent in the 12 months to January following a 10.5 percent year-on-year rise in December.

The Canadian data followed a U.S. report on Thursday that showed core consumer prices there rose at the quickest pace in 15 months in January, suggesting a long spell of slowing inflation was coming to an end.

Canada’s modest inflation picture also compares favorably to that in high-growth emerging economies, where surging commodity costs have put central banks on inflation alert.

China’s central bank raised lenders’ required reserves by 50 basis points on Friday, the second such increase this year as it tries to curb stubborn inflation.

South Africa, India and Russia are also concerned about rising prices, while food inflation has also been cited as a factor in the political unrest in the Middle East.

A report on Tuesday showed inflation in Britain jumped to twice the Bank of England’s target in January, prompting BoE Governor Mervyn King to acknowledge that interest rates might rise more rapidly than economists had expected.

Additional reporting by Howaida Sorour in Ottawa and Ka Yan Ng, Claire Sibonney and Euan Rocha in Toronto; Editing by Jeffrey Hodgson and Peter Galloway

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