Inflation eases but rate cut seen less likely

Canada's annual inflation rate moderated in October from a near three-year high in September but was still higher than expected, scaling back market bets for a central bank interest rate cut.

The consumer price index (CPI) rose 2.9 percent in October from a year earlier, easing from 3.2 percent in September as gasoline prices rose at a slower year-on-year pace, Statistics Canada said on Friday.

The core inflation rate, closely watched by the central bank because it excludes the prices of some volatile items, also eased to 2.1 percent from 2.2 percent.

While the move was in the right direction, it was less marked than forecast, prompting traders to scale back expectations the central bank would cut rates over worries about European and U.S. growth.

The consensus market forecast was slightly lower rates for total CPI and core CPI of 2.8 percent and 1.9 percent, respectively.

All in all, higher than expected inflation rate in Canada, said Camilla Sutton, chief currency strategist at Scotia Capital. With the exception of a few components most of the components were higher month-over-month so the gains were fairly broad-based, she said.

Canada's inflation has tamed since hitting a 5-1/2 year high of 3.7 percent in May. But the trend still mirrors growing price pressures seen across the industrialized world, which has put central bankers on the alert even while they keep a cautious eye on slumping confidence.

On a monthly basis, total CPI climbed 0.2 percent, matching the September gain. Core CPI rose 0.3 percent, down from 0.5 percent in September.

The currency touched a session high after the report of C$1.0200, or 98.04 U.S. cents, from C$1.0283, or 97.25 U.S. cents at closing on Thursday.

The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate moves, rose to 0.93 percent from 0.913 percent just before the release.

Canada's composite leading indicator, released 90 minutes after the inflation data, also showed signs of strength on continued household spending.

BOC NOT TOO CONCERNED

The main inflation rate in October stuck well above the central bank's 2 percent target and near the ceiling of its 1 to 3 percent control range.

Market reaction aside, economists doubted the data would shift the sands much for Bank of Canada Governor Mark Carney, given that the central bank has focused more in recent months on the risks to growth posed by Europe's lingering debt crisis.

If I'm the Bank of Canada I'm not too concerned that there's going to be a price shock going forward, said Mazen Issa, Canada macro strategist at TD Securities.

Mark Chandler, a fixed income strategist at RBC Capital Markets, agreed.

We failed to see the moderation that we expected but the dominant consideration for the Bank of Canada of course is still what's happening on the growth side, he said.

When the bank renewed its 2 percent inflation target earlier this month, it made clear it would be flexible with that target and sometimes tolerate higher price growth if the economy faced other threats, such as the European crisis or weak U.S. demand for its exports.

It projects total CPI and core CPI will return to 2 percent by the end of 2013.

The bank lifted its key overnight target rate last year to a still-low 1 percent from 0.25 percent but has held it steady since September 2010, citing European financial woes as the dominant risk.

Analysts surveyed by Reuters expect the next move to be a hike, some time in mid to late-2012 or early 2013.

But markets have been pricing in a rate cut for some time. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders scaled back bets on a rate cut for this year or next after the inflation data.