* 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 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
"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 2010, the longest period of bank
inactivity on rates since the early 1950s.
Separately, Statscan said the economy grew just 0.1 percent
in October. The Bank of Canada's latest forecast says
fourth-quarter growth will be 2.5 percent annualized, though
that estimate now looks very optimistic.
"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 the weak growth, 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 all prices for new
cars for the upcoming year into the inflation data for November,
when manufacturers traditionally launch new models.
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
"It certainly gives the Bank of Canada all the room they
need to stay on the sidelines for quite a while. I don't think
though that it will necessarily make them change their tone ...
They'll still say that at some point rates will go up, but that
point is further and further away," said Carlos Leitao, chief
economist at Laurentian Bank Securities in Montreal.
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.
The October growth figure of 0.1 percent matched analysts'
expectations. Overall, output rose in 12 of 18 sectors. Service
industries grew by 0.1 percent on strength in wholesale and
retail trade while goods production was unchanged.
Manufacturing output fell by 0.4 percent. Canadian companies
are struggling to cope with weak markets in the United States
and Europe as well as the challenges posed by a strong dollar.