Canadian inflation rate sinks to 1.7% as gas prices fall

Lower gas prices pulled Canada's annual inflation rate in November down to 1.7 per cent, the first time in 10 months it has been below the Bank of Canada's two per cent target, underscoring market expectations that imminent interest rate hikes are off the table.

Analysts in a Reuters poll had forecast the annual rate would fall to 1.8 per cent from 2.4 per cent in October. November's rate matched the 1.7 per cent in January 2018.

The Bank of Canada, which has raised rates five times since July 2017 as the economy strengthened, said earlier this month that economic data heading into the fourth quarter had been weaker than expected.

"There's absolutely no rush for the bank and probably the earliest we're going to hear from them is in the springtime, in terms of rate hikes," said Doug Porter, chief economist at BMO Capital Markets.

The central bank, which had predicted lower gas prices would pull down the annual rate, is due to announce its next interest rate decision on Jan. 9 and markets expect no change.

Toronto-Dominion Bank economist Ksenia Bushmeneva is also among those who thinks the weak inflation showing will lower the pressure on the central bank to keep hiking quickly.

"The Bank of Canada is not done raising rates, but with both core and headline price growth appearing soft and risks to the economy skewed to the downside, there is little urgency," she said. "As such, we expect just two rate hikes in 2019, with the next increase likely not coming until the spring."

Statistics Canada said on Wednesday that gasoline prices fell by 5.4 per cent from November 2017 on lower crude prices and overall energy costs dropped by 1.3 per cent over the same period. In both cases, it was the first year-over-year decline since June 2017.

It also noted that the Bank of Canada's three core inflation measurements came in at 1.9 percent, the first time they have all been below 2.0 per cent since June 2018.

"That informs a near-term dovish Bank of Canada. No hike in the first quarter (of 2019), probably returning to a hike in April is still our call," said Derek Holt, vice-president of capital markets economics at Scotiabank.

The drop in the overall annual rate was the sharpest in absolute terms since May 2012, when lower gas prices pulled it down to 1.2 per cent from 2.0 per cent in April.