CORRECTED – WRAPUP 1-Canada inflation dip may ease rate pressure

(Corrects fifth paragraph to say “raising rates by 50 basis
points in June”, instead of “cutting rates by 50 basis points
in June”.

* Core rate dips below Bank of Canada’s target

* Post-Olympic prices drop for hotels, tours

* Retail sales post 0.5 percent gain in February

By David Ljunggren

OTTAWA, April 23 (BestGrowthStock) – Canada’s annual core inflation
rate dropped unexpectedly in March, a development that analysts
said would reduce the odds of aggressive near-term rate hikes
by the Bank of Canada.

Statistics Canada said on Friday that the core rate fell to
to 1.7 percent from 2.1 percent, in part because prices for
travel and accommodation dropped after the end of the Winter
Olympics in Vancouver in February.

Market operators had predicted the core rate — which
excludes volatile items like gasoline — would dip to 1.9
percent in March on a year-on-year basis.

Compared with February, core CPI fell 0.2 percent in
March.

Doug Porter, deputy chief economist at BMO Capital Markets,
said the figures were “a fairly significant downside surprise”
which cut the chances of the Bank of Canada raising rates by 50
basis points in June.

“(It’s) not a complete shock given that many of the upside
surprises in recent months were seen as temporary. But still I
think it will be major source of reassurance for the bank that
there isn’t something really unusual going on in core
inflation,” he said.

The Bank of Canada this week dropped a conditional pledge
to keep interest rates on hold at least until the end of June
and also forecast that core inflation would stay close to its
2.0 percent target. [ID:nN22251878]

The Bank of Canada has the option of raising rates in both
June and July but Governor Mark Carney declined on Thursday to
give any specifics about what the central bank would do.

“I think we read what came out this week more as an
indication that the Bank of Canada wanted complete flexibility
in terms of when they go and this is one reason why they may
have wanted that flexibility,” said Craig Wright, chief
economist at the Royal Bank of Canada.

In a Reuters poll on Tuesday, 11 of Canada’s 12 primary
dealers predicted a rate hike of 25 basis points on June 1.
[CAD/POLL]

“This is a very soft report, and does muddy the water with
regard to the Bank of Canada’s monetary policy outlook,” said
Millan Mulraine of TD Securities, saying the chances of a June
rate hike have diminished somewhat.

The Canadian dollar weakened following the data, hitting a
session low of C$1.0050, or 99.50 U.S. cents, down from
C$1.0003, or 99.97 U.S. cents, just before the report.

Overnight index swaps, which trade based on expectations
for the Bank of Canada’s key policy rate, edged lower after the
announcement, showing the market saw tightening as slightly
less likely than before the data. (BOCWATCH: )

Still, the market was pricing in more than a 90 percent
probability that the central bank will hike interest rates by
0.25 percent in June.

Erin Weir, economist at the United Steelworkers union, said
the inflation figures showed Carney had been wrong to scrap the
conditional commitment not to raise rates.

“This unnecessary rush had the negative effect of driving
up Canada’s already overvalued currency,” Weir said.
Manufacturers complain that the strong Canadian dollar makes it
harder for them to sell their good abroad.

The central bank had predicted price rises related to the
Olympics would temporarily boost the inflation rate.

Overall inflation did not change in March from February
while in the 12-month period it eased to 1.4 percent from 1.6
percent.

Separately, Statistics Canada said retail sales increased
by 0.5 percent in February from January. The figures reflect
new sampling methods and are not comparable to those released
in previous months, the agency said.
(With additional writing by Jeffrey Hodgson; editing by Peter
Galloway)

CORRECTED – WRAPUP 1-Canada inflation dip may ease rate pressure