Canada's annual inflation rate fell to one per cent in June, the lowest level in eight months, prompting analysts to predict the Bank of Canada will move cautiously on future interest rate
increases.
The four-tenths of a point drop in the annual rate was widely expected, as was the 0.1 percentage point drop in prices between May and June.
The mild surprise was that underlying core inflation, which excludes the volatile energy component, edged lower by one-tenth of a point to 1.7 per cent.
Markets had been expecting the Bank of Canada core rate to edge higher to 1.9 per cent.
Canada's central bank aims to keep core inflation between one and three per cent, so June's report moves the number further to the low end of the range.
Markets barely took notice of the monthly report from Statistics Canada.
The Canadian dollar traded in a narrow band near Thursday's 96.22 cents US close following the 7 a.m. announcement.
What the lower core inflation profile suggests, however, is that central bank governor Mark Carney will feel little pressure to ramp up interest rates.
On Tuesday, the Bank of Canada increased its trendsetting rate by 25 basis points to 0.75 per cent, still well below the country's core inflation reading and regarded as extremely stimulative.
“The main point is that the bank cannot wait until inflation erupts, but this very much argues for a very cautions, low approach to unwinding the stimulus,” said Sal Guatieri, an economist at BMO Capital Markets.
Most analysts believe Carney will hike the policy rate one more time this year, likely in September, to one per cent and then head back on the sidelines until 2011.
But some continue to be critical of the Bank of Canada for applying the monetary brakes - or easing the accelerator, as the central bank would see it - before the economy is ready to stand on its own feet.
Canada's gross domestic product followed up the strong 4.9 per cent advance in the last three months of 2009 with an even bigger jump forward of 6.1 per cent in the first quarter of this year.
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