Canada Inflation Slowdown Reinforces Poloz Rate-Cut Argument

Canadian inflation slowed to 1.5 percent in December as cheaper gasoline countered accelerating prices on most other items, reinforcing Bank of Canada Governor Stephen Poloz’s argument the economy needs lower interest rates.

The core inflation rate, which excludes eight volatile products such as energy, quickened to 2.2 percent from November’s 2.1 percent pace, Statistics Canada said today from Ottawa. Economists in a Bloomberg News survey forecast the total rate would slow to 1.6 percent from 2.0 percent and core prices would rise 2.3 percent.

Poloz surprised markets two days ago by cutting the bank’s key rate to 0.75 percent saying the plunge in world oil prices would slow inflation to 0.3 percent in the second quarter. The central bank may act again to reduce rates if the world’s 11th largest economy shows more signs of weakening, he said.

Nick Exarhos, an economist at CIBC World Markets in Toronto, said today’s inflation reading supports the central bank’s decision to lower rates.

“They’ve made their move, Exarhos said in a telephone interview. ‘‘They don’t see inflation posing a threat to what is really more accommodative policy.”

Oil Plunge

Core inflation will remain close to 2 percent through next year, according to the Bank of Canada forecasts that were updated this week to account for the 57 percent plunge since June in benchmark crude prices. Oil extraction accounts for about 3 percent of Canada’s gross domestic product and crude oil about 14 percent of exports, Bank of Canada data show.

Canada’s dollar tumbled after Poloz’s rate cut this week and touched C$1.2456 against its U.S. counterpart today, the lowest level since April 2009. It pared losses after the inflation report to C$1.2422 at 2:06 p.m. Toronto time. Trading in overnight index swaps showed about a 25 percent chance the bank will cut rates again at the March 4 meeting.

“We don’t think that the relatively high core CPI number in any way deters the Bank of Canada from its current accommodative course, which is premised on the potential for economic weakness and diminished price pressure,” Derek Holt, Scotiabank’s vice-president of economics in Toronto, said in a note to clients today.

Gasoline prices dropped 9.8 percent in December and by 16.6 percent from 12 months earlier, Statistics Canada said. Excluding gasoline, the inflation rate was 2.3 percent.

Food Costs

Natural gas costs rose 16.5 percent, and food costs rose 3.7 percent, led by fresh vegetables and meat.

On a monthly basis, total inflation fell 0.7 percent in December and the core rate fell 0.3 percent. Economists in separate Bloomberg surveys predicted overall monthly prices would fall 0.6 percent and the core rate would decline by 0.3 percent.

Seasonally adjusted inflation fell 0.1 percent in December and the adjusted core rate rose 0.2 percent, the government agency said.

A separate Statistics Canada report showed retail sales posted a surprise gain of 0.4 percent to C$43 billion in November as an early winter boosted purchases of warm clothes and footwear. Economists surveyed by Bloomberg News forecast a 0.2 percent decrease, based on the median of 17 projections.

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