Weaker inflation slows to 1.3%, could weigh on central bank's rate decision

The data comes as the economy strengthens and the Bank of Canada prepares to make a scheduled interest rate announcement on July 12.

Gasoline prices declined in the month with the year-over-year increase slipping to 6.8 per cent from as high as 23 per cent in February.

"Further deceleration in core inflation is more likely to stay the bank's hand in July, while some stabilization or uptick, which can not be excluded at this stage, will put further pressure on the Bank of Canada to act", she said.

The central bank said in a statement that "the reference rate has reached a level that is consistent with the process of efficient convergence of inflation to the 3% target".

The all-items consumer-price index in May rose 1.3% from a year earlier, Statistics Canada said Friday, following a 1.6% advance in the previous month.

The Canadian dollar gained against the greenback and was trading at C$1.3253 or 74.45 US cents after Thursday's report. The other one was unchanged at 1.3 per cent.

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They signaled they were setting the groundwork to increase the policy rate, which sits at a near record low of 0.50%, adding that the two rate cuts it delivered in 2015 worked in helping the economy adjust to lower oil prices.

Gasoline prices fell 4.0% on the month and this was the main contributory to a 0.7% decline in transport costs for the month which held the annual rate at 2.2%.

Total food prices fell 0.1% from a year ago, the eighth consecutive monthly decline.

Canada's housing market has been robust, with sales and starts rising in the first months of 2017, though activity has cooled in Toronto since the provincial government imposed in late April a foreign buyers tax in Canada's largest city and surrounding areas as part of an effort to rein in the market.

"The market thinks that the inflation peak is near and that Banxico will end its cycle this Thursday", Finamex analyst Guillermo Aboumrad said in a note to clients.


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