March 18 (Bloomberg) -- Canada's 10-year government bonds posted their first weekly increase in a month on signs inflation remains tame.

Traders pushed up bond prices by the most since July on March 16 after the government's consumer price report fueled speculation the Bank of Canada will raise its benchmark interest rate only once more this year. The central bank has lifted the rate five times since September to keep inflation in check.

``Low inflation contributes to the solid performance in Canada's bond market,'' said David Wolf, chief strategist at Merrill Lynch Canada Inc. in Toronto. ``It is certainly something bond investors always want to see.''

The yield on the benchmark 10-year bond fell about 9 basis points, or 0.09 percentage point, to 4.15 percent this week. The previous weekly decline totaled 10 basis points during the week ended Feb. 17. It's down from this year's highest of 4.31 percent on March 6.

Yields move inversely with bond prices. The price of the 4.5 percent bond due June 2015 advanced 69 cents to C$102.66 this week. Inflation erodes the value of a bond's fixed payments.

The benchmark two-year bond's yield dropped 5 basis points, the most since a decline of 9 basis points during the period ended Feb. 17, to 3.90 percent this week. The price of the 2.75 percent bond maturing in December 2007 gained 11 cents to C$98.13.

Inflation Slows

The year-over-year consumer price index rose 2.2 percent in February after a 2.8 percent increase in the previous month, Statistics Canada said in Ottawa on March 15. Economists expected a 2.4 percent gain, based on the median of 18 forecasts in a Bloomberg News survey.

The CPI excluding fruit, gasoline and six other goods rose 1.7 percent last month from the same period a year ago, in line with the median forecast. The central bank uses the so-called core rate to gauge price trends when setting rates.

Core inflation has been below the bank's target of 2 percent for 26 consecutive months, said Wolf at Merrill.

``Inflation isn't out of hand anyway in Canada,'' said Eric Lascelles, a strategist at TD Securities in Toronto. ``The market may think the Bank of Canada will move less aggressively. It will be a surprise if the bank moves beyond 4 percent.''

4 Percent

The Bank of Canada, after boosting the overnight lending rate a quarter-point to 3.75 percent on March 7, said ``some modest'' further rate increases ``may'' be needed, changing the word from ``would'' in a previous statement in January.

The central bank may increase the benchmark rate to 4 percent by June 30 and pause there through year-end, based on the median forecast of 15 economists in a Bloomberg survey taken between Feb. 28 and March 7. The bank next meets on April 25 and May 24.

The yield on the June bankers' acceptances futures contract fell to 4.05 percent this week from 4.10 percent on March 10. The yield has dropped from 4.25 percent on Feb. 8, the highest this year.

Futures contracts are used to gauge expectations for the Bank of Canada's benchmark rate. Bankers' acceptances settle at a three-month lending rate that has averaged 16 basis points above the central bank's rate target since Bloomberg started tracking the gap in 1992.

`Pressure'

Further gains may be limited as government reports next week may show retail sales excluding the volatile automobile sector gained the most in four months, adding to evidence the economy continues to expand.

Retail sales, excluding automobiles and parts, probably increased 1 percent in January, the most since September, from 0.4 percent in December, according to the median estimate of seven economists in a Bloomberg survey.

``If retail sales remain healthy, it will give further support to the economic growth in the first quarter,'' said Andrew Pyle, head of capital markets research at Scotia Capital Inc. in Toronto. ``This put pressure on bonds.''

The Canadian dollar gained 0.2 percent to 86.36 U.S. cents this week. One U.S. dollar buys C$1.1580. The Canadian dollar reached 88.49 U.S. cents on March 2, the highest since Nov. 21, 1991.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: March 18, 2006 09:16 EST