* Annual inflation falls to 1.2 pct from 2 pct
* Core rate 1.8 pct; ex-energy 1.7 pct
* Cheaper gasoline main reason for decline
* Interest rates seen on hold
By Louise Egan
OTTAWA, June 22 (Reuters) – Annual inflation in Canada
slowed more sharply than expected in May, to 1.2 percent, due
partly to cheaper fuel prices, giving the central bank another
reason to refrain from raising interest rates any time soon.
The rise in the consumer price index (CPI) declined from 2
percent in April to its lowest level since June 2010, and was
below the 1.5 percent median forecast of analysts in a Reuters
poll. Gasoline prices tumbled on a year-on-year basis for the
first time in almost two years, according to Statistics Canada
data on Friday.
But the closely watched core inflation rate, a better
measure of underlying price trends because it excludes eight
volatile items, stayed closer to the Bank of Canada’s 2 percent
target, easing to 1.8 percent in May from 2.1 percent in the
previous month.
Excluding energy only, the index rose 1.7 percent on the
year, compared with 2.1 percent in April, Statscan said.
Canada’s central bank is alone among the world’s advanced
economies in talking about interest rate hikes – Governor Mark
Carney repeated that message on Thursday – but analysts say its
case has weakened considerably.
“The bank’s got much bigger items on their plate than
inflation; I don’t think inflation is crowding the top of
anybody’s worry list at this point,” said Doug Porter, deputy
chief economist at BMO Capital Markets.
“So I don’t think it has a big effect on the bank, but at
the very least it just sort of reinforces the message that
there’s not any rush for the bank to act on its tightening
bias.”
In a speech on Thursday, Carney stuck to the message he has
been giving since April – that a rate hike may be in the works
after the bank has held the benchmark lending rate at 1 percent
since September 2010.
But many doubt he is in any rush as the European debt crisis
threatens to slow the pace of growth, and new government
measures introduced on Thursday to curb heavy household
borrowing could substitute for tighter monetary policy. [ID:
nL1E8HLB49]
Analysts surveyed by Reuters in late May predicted the Bank
of Canada would resume raising rates in the first quarter of
2013. By contrast, markets are pricing in the chance of a rate
cut later this year.
Overnight index swaps, which trade based on expectations for
the central bank’s key policy rate, showed that traders slightly
increased bets on a rate cut after the inflation data.
But economists rule out any such stimulus unless there is a
major shock from Europe. Inflation could bounce back up in June
because of a big price drop in that month last year, and core
inflation remains sticky, they cautioned.
“Interest rate cuts by the bank are really not on the
table,” said David Tulk, chief Canada macro strategist at TD
Securities.
“(Core inflation) is consistent with a narrowing output gap
and should serve as a reminder to the market that pricing in an
outright cut in the overnight rate will end in disappointment,”
he said.
Even so, the Canadian dollar briefly weakened to a
session low of C$1.0301 to the U.S. dollar, or 97.08 U.S. cents
just after the data, from around C$1.0285 just before the data’s
release. It later recovered.
The Bank of Canada sees total CPI inflation below 2 percent
in the short term and core inflation remaining at about 2
percent. It will update its projections on July 18.
The CPI edged down 0.1 percent in May from April and core
CPI climbed 0.2 percent. Both had risen 0.4 percent in April.
Gasoline prices fell 2.3 percent from May 2011. Other
reasons for the lower inflation were a decline in clothing
prices and slower price gains in passenger vehicles.
