Inflation may ease pressure on loonie: analysts

Canada’s annual inflation rate rose to 1.2 per cent last month, still below the Bank of Canada’s ideal target but back within its desired range.

OTTAWA — Canada’s annual inflation rate rose to 1.2 per cent last month, still below the Bank of Canada’s ideal target but back within its desired range.

It likely won’t assuage the central bank’s worries over persistently low inflation in Canada, but it may ease pressure on the falling loonie, economists said Friday.

While it’s reassuring to see inflation back in the bank’s target range, “the report still fails to reveal the kind of thrust that would inspire a tone shift at the (Bank of Canada),” Jimmy Jean, economic strategist with Desjardins, said in a note.

It could take until mid-year for the consumer price index to move to the bank’s ideal two per cent target in a sustained way, he said.

The 1.2 per cent climb in the consumer price index’s basket of goods that Canadians regularly purchase for December was up from gain of 0.9 per cent in November.

The Bank of Canada raised concerns about low inflation on Wednesday after it lowered its forecast and said it was keeping a close eye on prices. The central bank, which worries persistent low inflation may be a sign of weakness in the economy, forecasts inflation will likely reach the two per cent mark in about two years.

The Bank of Canada’s core index, which excludes several volatile components that are part of the broader consumer price index, rose 1.3 per cent for December compared with 1.1 per cent for November.

The report Friday carried a lot more weight than usual, given that the bank has “lifted inflation to exalted status in their worry list,” said BMO chief economist Douglas Porter.

“However, the results are a stalemate for the market since they precisely met the bank’s assumptions,” he said in a note.

“For now, though, inflation has moved above the very low end of the Bank’s comfort zone, providing a touch of breathing space and easing one source of pressure on the loonie.”

The loonie was up 0.19 of a cent to 90.29 cents U.S. before noon Friday.

CIBC economist Peter Buchanan said the Bank of Canada is going to want to see more data before their concerns ease, but the numbers were within expectations.

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