By Leah Schnurr
OTTAWA (Reuters) - Canada's annual inflation rate cooled more than expected in March, pulling away from the central bank's target as food prices dropped for the sixth month in a row, underscoring expectations interest rates will stay put for some time.
The annual rate fell to 1.6 percent from the previous month's 2.0 percent, Statistics Canada said on Friday, exceeding forecasts for a decline to 1.8 percent.
The three measures of core inflation put in place by the Bank of Canada last year remained tame, with CPI common the lowest at 1.3 percent.
The central bank, which has an overall inflation target of 2.0 percent, had dismissed a recent rise in inflation, saying that reflected temporary factors.
The bank cut rates twice in 2015 as the economy was hit by the oil price shock. While economists have seen the odds of another rate cut diminishing amid signs of a strong first quarter, they said the muted inflation figures gave no reason for policymakers to begin hiking rates.
"This is suggesting that there is really not a whole lot of inflationary pressure in Canada right now, thereby no real reason for the Bank of Canada to move any time soon," said Brian Depratto, senior economist at TD.
The Canadian dollar weakened against the greenback immediately following the data. [CAD/]
The central bank is expected to hold interest rates at 0.50 percent until next year. It said after last week's rate decision it had not considered cutting rates, though it was too early to say the recent economic strength is sustainable.
Food prices were down 1.9 percent on a year-over-year basis as Canadians paid less for food purchased in stores, while a decline in clothing costs also weighed on inflation.
That was offset by a 4.6 percent increase in transportation costs, led by higher prices for gasoline.
Among the closely watched core measures, CPI common, which the central bank says is the best gauge of the economy's underperformance, was unchanged at 1.3 percent.
CPI median, which shows the median inflation rate across CPI components, slipped to 1.7 percent, while CPI trim, which excludes upside and downside outliers, dipped to 1.4 percent.
Derek Holt, economist at Scotiabank, said the core measures drifting lower was likely the more disturbing element for the Bank of Canada.
"I just don't see the talk of rate hikes anytime soon as being credible, anchored in the inflation numbers that we're getting," he said.
(Additional reporting by John Tilak and Matt Scuffham in Toronto; Editing by Meredith Mazzilli)