Canada inflation rate holds steady in August, gasoline drops

By Leah Schnurr OTTAWA (Reuters) - Canada's annual inflation rate held steady in August as lower gasoline prices moderated the higher cost of food, data showed on Friday, suggesting the Bank of Canada has room to keep interest rates low. Annual inflation was 1.3 percent last month, according to Statistics Canada, the same as in July and matching economists' forecasts. Core inflation, which strips out volatile items and is closely watched by the Bank of Canada, was less muted at 2.1 percent, though that was down from July's 2.4 percent. The bank, which has an inflation target of 2 percent, sees the effects of a weaker currency and some sector-specific factors as temporarily boosting the core rate. Economists did not expect Friday's figures to change the path of monetary policy. "I think it'll be another case where they'll be indicating the numbers are in line with their forecast and, as a result, reason just to hold policy steady here in the near-term," said Paul Ferley, assistant chief economist at Royal Bank of Canada. The Bank of Canada has cut interest rates twice this year to try to bolster an economy that was in mild recession in the first half of 2015. The central bank is widely expected to hold rates at 0.50 percent when it meets next month, with markets pricing in just a 22 percent chance of a third rate cut in October. The Canadian dollar was little changed against the greenback immediately after the inflation report, as investors also considered Thursday's decision by the U.S. Federal Reserve not to raise interest rates. Prices were up on an annual basis in seven of the eight major components of the overall consumer price index. Food saw the biggest increase, with prices up 3.6 percent, but gasoline prices continued to drop and were down 12.6 percent annually. There are some cross-currents at play that will unfold over the coming months, said Doug Porter, chief economist at BMO Capital Markets. "On the one side, of course, gasoline prices have plunged anew and that should undercut the headline inflation rate somewhat, but on the other side, there is some talk of a repricing of a lot of items because of the summer decline in the Canadian dollar," said Porter. "We'll have to see if that does play out in core inflation or not." (Additional reporting by Susan Taylor and Andrea Hopkins in Toronto; Editing by Bernadette Baum)