May 20, 2009 / 11:11 AM / in 9 years

UPDATE 3-Canada inflation rate hits 14-year low in April

* Annual rate drops to 14-year low of 0.4 percent

* Core rate slips to 1.8 percent from 2.0 percent

* Analysts say Bank of Canada set to leave rates untouched (Adds reaction, Canadian dollar move, byline)

By David Ljunggren

OTTAWA, May 20 (Reuters) - Canada’s annual inflation rate in April dropped to a 14-year low of just 0.4 percent, a move analysts said meant the Bank of Canada would be in no rush to raise record-low interest rates.

The rate dropped from 1.2 percent in March on lower energy prices, Statistics Canada said on Wednesday.

Analysts had on average expected an annual rate of 0.6 percent. April’s figure was the lowest since the 0.2 percent recorded in December 1994, when taxes on tobacco products were cut sharply as part of a campaign to fight smuggling.

The central bank last month cut its benchmark interest rate to 0.25 percent and promised to keep it there until mid-2010 as long as inflation remained tame.

“There is still a good deal of slack that has built up in the Canadian economy and that compels us to think that the Bank of Canada has good support for their commitment to keep rates steady for the next several quarters,” said Charmaine Buskas, a senior economics strategist at TD Securities.

The Canadian dollar firmed following the data and by 8:30 a.m. (1230 GMT) was at C$1.1488, or 87.05 U.S. cents, from around C$1.1553, or 86.56 U.S. cents.

Statscan said the drop in the annual rate reflected a decrease of 17.5 percent in natural gas prices from April 2008 to April 2009. Gasoline prices fell 24.7 percent in the same 12-month period.

“This is slowing more aggressively in line with the Bank of Canada’s expectations than was previously the case. That’s supportive of their signal to the markets that they’re going to keep rates low for a very long period of time,” said Scotia Capital economist Derek Holt.

The core annual inflation rate -- closely watched by the Bank of Canada -- dropped to 1.8 percent from 2.0 percent in March. The rate excludes the costs of volatile components such as fruit, vegetables, natural gas, fuel oil and gasoline.

The fall in energy costs helped offset a rise in food prices, which have been steadily increasing since February 2008. Prices in April were 7.1 percent higher than a year earlier, slower than the 7.9 percent year-on-year increase in March.

”We know that gasoline prices have backed up in recent weeks again. But it still looks like Canadian headline inflation is going to dip into negative territory next month on a year-over-year basis, joining much of the rest of the world,’ said Doug Porter of BMO Capital Markets.

Deputy Bank of Canada Governor John Murray said on Tuesday that the risks of either a deflationary collapse or an inflationary spiral had been greatly exaggerated.

Inflation in April fell by 0.1 percent from March while the core rate increased by 0.1 percent over the same period. (Additional reporting by Ka Yan Ng; Editing by James Dalgleish)

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