* C$ firms to 97.56 U.S. cents
* Bonds flat to higher
* Canadian inflation muted (Adds details, commentary)
TORONTO, Oct 22 (Reuters) - The Canadian dollar firmed slightly against its U.S. counterpart on Friday after domestic inflation rose as expected, prompting analysts to predict the Bank of Canada would keep interest rates steady.
Canada's annual inflation rate rose to 1.9 percent in September from 1.7 percent in August, in line with consensus, in part due to higher prices for energy, autos and electricity. [ID:nN22157729]
The annual core inflation rate, which strips out volatile items and the effects of tax changes, dropped to 1.5 percent from 1.6 percent. Analysts had forecast it would stay unchanged, signaling some softness in the report overall.
Sheryl King, chief Canadian economist at Bank of America Merrill Lynch, said the latest data was unlikely to strengthen the resolve of those who think the Bank of Canada will begin to raise interest rates soon.
"Broadly speaking this (data) shouldn't have very much of an impact on the Canadian dollar," she said.
The central bank paused on rates earlier this week, and said that it would have to consider any further rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth. [ID:nN20223890]
"I don't think it's much in the way of a market mover simply because of what we already know from the Bank of Canada," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.
He said there is still a chance the bank could hike rates again as soon as March 2011.
"But we've got so much data between now and then, that they have the luxury really of sitting back and waiting to see how the data pans out," said Chandler. "To be honest in the current environment, it's probably demand figures that will be a little more important than inflation figures."
At 8:15 a.m. (1215 GMT), the Canadian dollarstood at C$1.0259 to the U.S. dollar, or 97.48, up a touch from it's Thursday finish at C$1.0263 to the U.S. dollar, or 97.44 U.S. cents.
Investors will look to domestic retail sales data at 8:30 a.m. for further direction. More broadly, focus will shift to the Group of 20 meeting in South Korea. Many expect finance and central bank chiefs to try to reach agreement on a common path to manage currency, trade and macroeconomic imbalances.
Canadian bond prices firmed slightly, tracking U.S. Treasuries higher, but the market remained largely subdued ahead of November's crucial Federal Open Market Committee meeting, where the Fed could announce further monetary stimulus. [US/]
Chandler noted there was little new direction for the domestic bond market to take from the inflation data and signals for the Bank of Canada.
"There's not much priced in so there's very little to take out when you get soft data. In this environment you almost have to look at the Canadian dollar as a better indicator and actually very little movement in the numbers themselves," he said.
The two-year bondwas unchanged to yield 1.394 percent, while the 30-year bond gained 5 Canadian cents to yield 2.754 percent. (Reporting by Claire Sibonney; editing by Jeffrey Hodgson)
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