March 18 (Bloomberg) -- Canada's annual inflation rate fell to a six-month low in February, as car prices plunged and gasoline costs eased, supporting the case for a fourth straight interest-rate reduction in April.

Consumer prices rose 1.8 percent in February from a year earlier, dropping below the central bank's target for the first time in seven months from 2.2 percent in January. Economists correctly forecast the decline, based on the median of 21 estimates.

The report signals the Bank of Canada will lower borrowing costs again to boost economic growth in the face of a possible U.S. recession. The bank this month reduced the benchmark rate 50 basis points to 3.5 percent and economists say the bank will cut 75 basis points more by the end of the second quarter, according to the median of 13 responses in a Bloomberg survey.

``Inflation is under control and that's good news,'' said Stefane Marion, an economist with National Bank Financial in Montreal. ``Inflation is not an impediment to rate cuts in Canada, contrary to other countries where central bankers might be more hesitant.''

The Bank of Canada alters borrowing costs to keep inflation at or near a target of 2 percent. The bank said March 4 when it last lowered rates that inflation risks had ``clearly shifted to the downside.''

Interest-Rate Futures

The yield on the September bankers' acceptance futures contract advanced 15 basis points to 2.62 percent as of 4:20 p.m. in Montreal. The gap with the central bank's lending rate shows investors are betting on more rate cuts.

Still, core inflation -- which excludes volatile items such as gasoline -- accelerated for the first time since June to 1.5 percent from 1.4 percent in January. Economists forecast the core rate, which the central bank uses as a gauge of future trends, would fall to 1.2 percent, the median of 21 estimates. All economists predicted the rate would drop.

``It's a subtle indication that maybe the big drawdown in core inflation has come to an end,'' said Doug Porter, an economist with BMO Capital Markets in Toronto. ``We didn't see signs of heavy-duty discounting, outside of autos.''

On a monthly basis, the all-items index rose 0.4 percent in February and the core index gained 0.5 percent, faster than the 0.3 percent that economists predicted for both gauges.

Cheaper Autos

Statistics Canada attributed February's slowdown in annual inflation to a 6.8 percent drop in the cost of buying or leasing a car, the biggest decline since February 1956, on discounts for 2008 models. The agency said such price cuts normally appear later in the year as new models are unveiled.

Prices ``remain low enough for the Bank of Canada to remain on its easing track,'' Avery Shenfeld, an economist with CIBC World Markets in Toronto, said in a note to clients. Shenfeld predicts the central bank will keep its benchmark within 1.25 percentage points of the U.S. Federal Reserve's rate, which fell to 2.25 percent today.

The Canadian currency's rise to parity with the U.S. dollar last year prompted consumers to demand lower prices for imports such as cars, books and electronics.

The so-called loonie has gained 18 percent in the past 12 month and traded close to parity since early December. It strengthened 0.3 percent to 99.47 Canadian cents per U.S. dollar today in Toronto, from 99.79 cents yesterday.

``We're still seeing the pass-through from the higher Canadian dollar,'' Marion said, referring to a 2.8 percent decline from a year ago in the ``core goods'' gauge, which includes items such as cars and books.

Prices for computers and related equipment dropped 15 percent from a year ago, Statistics Canada said.

Gasoline prices were 17 percent higher last month than in February 2007, compared with a 21 percent gain in January, and the cost of interest on mortgages rose 8.1 percent, the eighth straight increase, as home prices continued to gain.

Home prices will stabilize in the coming months, pushing inflation down to 1 percent by May, Marion said.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

Last Updated: March 18, 2008 16:31 EDT