Canada inflation jumps, rate change still seen far off

By David Ljunggren

OTTAWA (Reuters) - Canada's annual inflation rate jumped more than expected in February, but analysts said the spike was unlikely to pressure the Bank of Canada to raise interest rates any time soon.

The year-on-year rate rose to 1.2 percent from a three-year-low of 0.5 percent in January on higher gas and auto prices, Statistics Canada said on Wednesday.

That's still well below the midpoint of the Bank of Canada's 1.0 to 3.0 percent target range.

The central bank has said it expects to raise interest rates one day, despite still-low year-on-year inflation. But the time frame for a possible rate hike has kept stretching out as domestic and global economies have stumbled.

"There will be a short-lived pop in the currency, but I don't think it is going to make a fundamental change in the bank's outlook," said Doug Porter, chief economist at BMO Capital Markets. "I don't think this advances the timetable on Bank of Canada rate hikes."

Analysts surveyed by Reuters in late February didn't expect any move by the central bank before next year.

Monthly inflation jumped to 1.2 percent, the steepest month-on-month jump in prices since January 1991, when the federal government introduced a goods and services tax and prices were also up 1.2 percent on the month.

Seven of eight components in the consumer price index were higher in February, with transportation prices - including gas prices - up particularly steeply.

"Anytime you get a monthly rise of more than one percent in the headline is huge. Of course we've got to put in the context that we've just come off a period of remarkable calm in Canadian inflation and this looks to be quite the payback," said Porter.

GAS, VEHICLE PRICES UP

The data helped briefly push the Canadian dollar higher against the U.S. dollar. It touched a session high of C$1.0155 versus the U.S. dollar, or 98.47 U.S. cents, up from C$1.0177, or 98.26 U.S. cents, immediately before the data.

"Anyone that is still contemplating rate cuts will have to revisit that with today's stronger than expected number," said Sebastien Lavoie, economist at Laurentian Bank. "But we have to put that in context and realize that previous CPI numbers over the last few months were quite tame."

Gas prices advanced 3.9 percent year over year in February after dropping 1.8 percent in the 12 months to January. February gas prices rose by 8.4 percent from January, the largest month-on-month increase since the 8.8 percent seen in May 2008.

The cost of passenger vehicles rose by 2.5 percent in the 12 months to February, when the number of manufacturers' rebates dropped, after falling 0.8 percent in the year to January.

The Bank of Canada's closely-watched core rate, which strips out prices of more volatile items such as energy and some foodstuffs, rose 1.4 percent in the 12 months to February following a 1.0 percent year-on-year advance in January.

The bank softened its stance on the need for interest rate hikes earlier this month, saying it was likely to hold its benchmark rate steady for "a period of time" given slack in the economy and tepid growth.

The central bank's overnight lending target has been at a near-record low of 1.0 percent since September 2010.

"When you are looking at the annual growth in prices, we are back in the target range of the Bank of Canada. This was expected. The return to target is maybe earlier than expected, but it was expected quite soon," said Benoit Durocher, a senior economist at Desjardins.

"The inflation pressure should stay very low in the coming months. For the Bank of Canada, it doesn't change anything."

(Additional reporting by Solarina Ho, Andrea Hopkins and Alastair Sharp in Toronto; Editing by Janet Guttsman, Jeffrey Hodgson and Bernadette Baum)

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Canada inflation jumps, rate change still seen far off

By David Ljunggren

OTTAWA (Reuters) - Canada's annual inflation rate jumped more than expected in February, but analysts said the spike was unlikely to pressure the Bank of Canada to raise interest rates any time soon.

The year-on-year rate rose to 1.2 percent from a three-year-low of 0.5 percent in January on higher gas and auto prices, Statistics Canada said on Wednesday.

That's still well below the midpoint of the Bank of Canada's 1.0 to 3.0 percent target range.

The central bank has said it expects to raise interest rates one day, despite still-low year-on-year inflation. But the time frame for a possible rate hike has kept stretching out as domestic and global economies have stumbled.

"There will be a short-lived pop in the currency, but I don't think it is going to make a fundamental change in the bank's outlook," said Doug Porter, chief economist at BMO Capital Markets. "I don't think this advances the timetable on Bank of Canada rate hikes."

Analysts surveyed by Reuters in late February didn't expect any move by the central bank before next year.

Monthly inflation jumped to 1.2 percent, the steepest month-on-month jump in prices since January 1991, when the federal government introduced a goods and services tax and prices were also up 1.2 percent on the month.

Seven of eight components in the consumer price index were higher in February, with transportation prices - including gas prices - up particularly steeply.

"Anytime you get a monthly rise of more than one percent in the headline is huge. Of course we've got to put in the context that we've just come off a period of remarkable calm in Canadian inflation and this looks to be quite the payback," said Porter.

GAS, VEHICLE PRICES UP

The data helped briefly push the Canadian dollar higher against the U.S. dollar. It touched a session high of C$1.0155 versus the U.S. dollar, or 98.47 U.S. cents, up from C$1.0177, or 98.26 U.S. cents, immediately before the data.

"Anyone that is still contemplating rate cuts will have to revisit that with today's stronger than expected number," said Sebastien Lavoie, economist at Laurentian Bank. "But we have to put that in context and realize that previous CPI numbers over the last few months were quite tame."

Gas prices advanced 3.9 percent year over year in February after dropping 1.8 percent in the 12 months to January. February gas prices rose by 8.4 percent from January, the largest month-on-month increase since the 8.8 percent seen in May 2008.

The cost of passenger vehicles rose by 2.5 percent in the 12 months to February, when the number of manufacturers' rebates dropped, after falling 0.8 percent in the year to January.

The Bank of Canada's closely-watched core rate, which strips out prices of more volatile items such as energy and some foodstuffs, rose 1.4 percent in the 12 months to February following a 1.0 percent year-on-year advance in January.

The bank softened its stance on the need for interest rate hikes earlier this month, saying it was likely to hold its benchmark rate steady for "a period of time" given slack in the economy and tepid growth.

The central bank's overnight lending target has been at a near-record low of 1.0 percent since September 2010.

"When you are looking at the annual growth in prices, we are back in the target range of the Bank of Canada. This was expected. The return to target is maybe earlier than expected, but it was expected quite soon," said Benoit Durocher, a senior economist at Desjardins.

"The inflation pressure should stay very low in the coming months. For the Bank of Canada, it doesn't change anything."

(Additional reporting by Solarina Ho, Andrea Hopkins and Alastair Sharp in Toronto; Editing by Janet Guttsman, Jeffrey Hodgson and Bernadette Baum)

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Canada gets double blow on inflation, retail trade

OTTAWA (Reuters) - The Canadian economy registered its lowest inflation in more than three years in January and its largest decline in retail sales in almost three years in December, a double whammy of data that depressed the Canadian dollar and bond yields.

"All of this would feed into a dovish Bank of Canada and Canadian dollar weakness," said Camilla Sutton, chief currency strategist at Scotiabank.

Statistics Canada said on Friday that lower gas prices helped push the annual inflation rate down to 0.5 percent in January from 0.8 percent in December, the lowest since the 0.1 percent recorded in October 2009.

The rate is less than the 0.7 percent predicted by market analysts and farther outside the Bank of Canada's target range of 1 to 3 percent, offering further proof that the central bank is under no pressure to raise interest rates.

The Bank of Canada's closely watched core rate, which excludes the prices of items such as energy, tobacco and some food, slipped to 1.0 percent from 1.1 percent in December.

Sutton also noted with concern that on a seasonally adjusted basis, prices fell 0.1 percent in January from December.

The 2.1 percent fall in seasonally adjusted retail sales in December from November was far larger than the 0.3 percent decline predicted by market operators and suggested already muted expectations for fourth quarter growth might be too optimistic.

The monthly fall in retail sales was the greatest since the 2.4 percent decline recorded in April 2010. Trade was pulled down by slumping new car sales and a weak Christmas shopping season. Year on year, sales were down 0.7 percent, the worst since October 2009.

Last month the Bank of Canada already cut its fourth quarter growth forecast to 1.0 percent from 2.5 percent. December growth is likely to be disappointing given poor manufacturing and wholesale and now retail trade. Statscan is to release December and fourth quarter gross domestic product data on March 1.

In volume terms, used for calculating real gross domestic product moves, retail sales fell 1.6 percent.

Sales by auto and parts dealers dropped by 6.4 percent Sales at electronics and appliance stores, which jumped in November as Apple rolled out its iPad mini, fell by 12.1 percent.

Last month the Bank of Canada already cut its forecast for fourth quarter growth to 1.0 percent from 2.5 percent. December growth is likely to be disappointing given poor manufacturing and wholesale and now retail trade. Statscan releases December and fourth quarter GDP data on March 1.

"Basically this combination of data just piles on what had already been a weak footing for the Canadian dollar. Both numbers came in below already weak expectations. Obviously the real eye-opener here was the retail sales result," BMO Capital Markets chief economist Doug Porter said.

"We had been looking for a decline, but nothing on the order of that. And of course December just happens to be the most important month of the year for retailers. So obviously what had been a so-so year for retailers ended with a thud in December."

The Canadian dollar softened to its weakest level in seven months on the data, touching C$1.0230 versus the U.S. dollar, or 97.75 U.S. cents. It was at C$1.0210, or 97.94 U.S. cents shortly before the data release and finished Thursday's North American session at C$1.087, or 98.16 U.S. cents.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders eliminated already small bets on a rate increase in late 2013.

(Additional reporting by Alastair Sharp, Andrea Hopkins and Solarina Ho in Toronto; Editing by Chizu Nomiyama)

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