Canada's inflation up, rate pressure muted

Canada's annual inflation rate rose more than expected in January, boosted by higher energy and transportation prices, but the increase is unlikely to spur the Bank of Canada to raise interest rates this year. The annual rate inched up to 2.5 percent in January from 2.3 percent in December, Statistics Canada said on Friday. The year-over-year advance was slightly bigger than the 2.3 percent predicted by economists.
The Bank of Canada, whose target range for inflation is 1 percent to 3 percent, has made it clear it will keep interest rates low for the time being. Most economists expect the next rate hike in early 2013. "We are not seeing aggressive pressures one way or the other, so it just confirms the Bank of Canada's very neutral stance at this point," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets. The central bank held its key interest rate at an ultra-low 1 percent in January for the 16th straight month and gave no indication it planned to move rates either up or down.
The bank has predicted that year-on-year inflation in the first quarter of 2012 will be 2.2 percent, dropping to 1.7 percent by the fourth quarter, before recovering to 2 percent by the third quarter of 2013. The latest data came after price increases in December eased more than the market had expected, a report one economist described as a "dream" for the inflation-wary central bank.
"This puts inflation back closer to the track that (the Bank of Canada) had laid out in ... in January, so I don't think this is going to move the needle for the bank." While most economists expected the central bank to keep rates on hold this year, the overnight index swap market priced in the possibility of easing. But traders reduced bets on a rate cut in the second half of 2012, following the unexpectedly stronger inflation data. The Canadian dollar rallied to a session high of C$0.9941 against the greenback, or $1.0059, after the report from around C$0.9961 immediately before. The prospect of steady or rising interest rates tends to help currencies strengthen by attracting international capital flows.
The report showed energy prices increased by 6.5 percent in the 12 months to January, compared with an equivalent 6.0 percent advance in December. Year-over-year transportation costs rose by 3.7 percent in January after increasing by 3.3 percent in December.
The inflation reading was also boosted by an increase in the sales tax rate in the province of Quebec, economists noted. The closely watched annual core inflation rate, which strips out the prices of volatile items such as fuel and some foods, climbed to 2.1 percent from 1.9 percent in December.