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inflation muted, no rate pressure seen

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Canada's annual inflation rate rose to a relatively tame 1.9 percent in September, as expected, prompting analysts to predict the Bank of Canada would keep interest rates steady for the time being.

    

Statistics Canada said Friday that higher energy and transportation costs pushed the overall index up from the 1.7 percent recorded in August. The annual core inflation rate, which strips out volatile items and the effects of tax changes, dropped to 1.5 percent from 1.6 percent.

   

The figures are unlikely to alarm the Bank of Canada, which kept interest rates on hold this week and promised to carefully consider any future hikes. It predicted both measures of annual inflation would hit its 2.0 percent target by the end of 2012.

   

"I don't think it's much in the way of a market mover simply because of what we already know from the Bank of Canada this week and I don't think as well that it's going to have much of an impact in their near-term thinking," said Mark Chandler of RBC Capital Markets.

   

The Canadian dollar firmed to $1.0255, or 97.51 U.S. cents, from $1.0274, or 97.33 U.S. cents just before the report.

   

Prices increased in seven of the eight major components of inflation, with clothing and footwear as the only exception. Energy prices advanced 5.6 percent during the 12  months to September compared to a 5.0 percent rise in August.

   

The consumer price index rose by 0.2 percent in September from August while the core rate was also up by 0.2 percent. The seasonally adjusted rate posted a 0.3-percent month-on-month increase.

   

"Inflation remains tame in Canada, which will allow the Bank of Canada to stay on hold well into 2011," said Robert Kavcic of BMO Capital Markets.

   

Traders are split over when the central bank -- which had raised rates three consecutive times between June and September -- will move again.

   

A Reuters poll of Canada's 12 primary dealers this week showed five expect the bank to have hiked rates at least once by next March.

   

Based on a Reuters calculation, the market is pricing in an 97.64-percent chance rates will remain on hold at the Dec. 7 rate decision.

   

"I think it's very much a sleeper, that report, in the sense that I think the (Bank) was right to take a pause earlier this week and signal a more dovish tune," said Sebastien Lavoie, an economist at Laurentian Bank of Canada.

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