WRAPUP 1-Canada inflation rate slows, puts rate-hike bias in question

Fri Dec 21, 2012 9:22am EST

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* November rate slows to 0.8 pct from 1.2 pct in October

* Gas prices post smaller year-over-year increase

By David Ljunggren

OTTAWA, Dec 21 (Reuters) - Canada's annual inflation rate fell to a three-year low of 0.8 percent in November, raising questions about the Bank of Canada's stubborn insistence that the next move in interest rates will be an increase.

The annual rate, reported by Statistics Canada on Friday, is far below the Bank of Canada's 2.0 percent target. Analysts had expected annual inflation of 1.1 percent, down from 1.2 percent in October.

"I suspect they (the Bank of Canada) knew by a little while ago that they had overestimated growth, and I don't think there's going to be any sudden changes, but it will raise the question again whether they'll soon back away from their tightening bias," said Doug Porter, deputy chief economist at Bank of Montreal.

The Bank of Canada has repeatedly said it will eventually need to raise interest rates despite clear signs that the economy is slowing. It has held its overnight lending rate at 1 percent since September of 2010, the longest period of bank inactivity on rates since the early 1950s.

"There's no pressure on the Bank of Canada to take interest rates higher for the foreseeable future," said David Tulk, chief Canada macroeconomic strategist at TD Securities.

In late November, a Reuters poll of market forecasters found that most expected the bank to raise rates in the fourth quarter of 2013 at the earliest.

The inflation data, combined with weak growth figures for October, helped push down the Canadian dollar to a session low against its U.S. counterpart on Friday.

The currency touched C$0.9920 versus the greenback, or $1.0081, compared with around C$0.9916, or $1.0085 before the release.

Gasoline prices rose just 0.4 percent in the 12 months to November compared with a 4.0 percent jump in October.

Prices for passenger vehicles fell by 1.8 percent, which in part reflects changes in the way Statistics Canada calculates some data. The agency no longer incorporates prices for new cars for the upcoming year into the inflation data for November, when manufacturers traditionally launch new models.

The Bank of Canada's annual core inflation rate, which strips out the price of items such as gasoline and some food items, dropped to 1.2 percent from 1.3 percent in October.

Statscan said the economy grew just 0.1 percent in October. The Bank of Canada says fourth-quarter growth will be 2.5 percent annualized, though that estimate now looks optimistic.

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

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