Canada's annual inflation rate held unchanged at 2.2 percent in July and the core rate fell to 2.3 percent from 2.5 percent in June, a steady performance that analysts said makes an interest rate rise in September highly unlikely.

Statistics Canada said on Tuesday that lower energy prices countered the fact that a sales tax cut on July 1, 2006, dropped out of the annual inflation calculations. The tax cut had reduced inflation by an estimated 0.6 percentage points in July last year. Energy prices fell 1.7 percent from July 2006.

At the very least you can say it will give the Bank of Canada a bit more comfort in standing on the sidelines in September as it waits out the financial market squalls, BMO Capital Markets deputy chief economist Doug Porter said of the July figures.

BMO changed its interest-rate forecast on Tuesday and said that instead of raising rates in September, as had been widely expected earlier this summer, the Bank of Canada would stay on hold until next year.

The central bank targets inflation at 2 percent and tries to keep it between 1 and 3 percent. In July it said overall and core inflation was higher than projected, but should decline to 2 percent by early 2009.

The bank last month forecast total inflation of 2.6 percent in the third quarter, rising to 3.0 percent in the fourth. It saw core inflation, which strips out volatile items, at 2.3 percent in the third quarter and 2.2 percent in the fourth.

Before the latest financial market turmoil, the bank had said further rate hikes may be required, but analysts now increasingly expect it will stand pat on Sept. 5, its next scheduled interest rate announcement date. There's even been talk of a quick rate cut.

Another indicator came in soft on Tuesday. Retail sales in June declined by a greater-than-expected 0.9 percent from May, when sales rose by a decade-high 2.6 percent. Overall for the second quarter, retail sales rose by 3.0 percent.

TD Securities forecasts the Bank of Canada will hike rates in October after giving September a miss, pointing out rising wage growth and low unemployment.

I think the market perspective is if inflation gets sufficiently soft that opens the door to rate cuts, and I don't think this number is sufficiently soft to really support that, TD Securities strategist Eric Lascelles said.

The central bank also faces the challenge of uneven performance across Canada. Prices rose a year-on-year 5 percent in the oil-boom province of Alberta, but they were up only 1.0 percent in Newfoundland, and 1.3 percent in Quebec.

Canada Inflation