OTTAWA, Feb 21 (Reuters) - Canada's annual inflation rate eased more than expected to 5.9% in January, data showed on Tuesday, backing up the Bank of Canada's declared aim to keep rates on hold at its next meeting to let previous rate hikes sink in.
Analysts had expected inflation to edge down to 6.1% from 6.3% in December. Month over month, the consumer price index rose 0.5%, Statistics Canada said, again lower than analysts' forecast of a 0.7% gain after a 0.6% decline in December.
Statscan said part of the easing of the annual rate was due to the comparison with last year's strong inflation numbers, or because of a base effect. In January last year prices gained amid Russia-Ukraine tensions and supply chain disruptions.
"There were some very strong base effects from last January that are starting to roll out of the headline inflation metrics," said Andrew Kelvin, chief Canada strategist at TD Securities.
The inflation figure "allows (the Bank of Canada) to stay on hold in March, despite the fact that the labor market was extraordinarily hot in the month of January," he said.
The Bank of Canada in January raised its benchmark interest rate to a 15-year high of 4.5% and became the first major central bank to say it would hold off on further increases as long as prices eased in line with its forecast.
But Canada's economy then smashed expectations by adding a net 150,000 jobs in January, data showed earlier this month.
Markets toned down their bets on another rate hike after the release of the inflation figures. Money markets now see a roughly 80% chance that the Bank of Canada will raise interest rates again this year after having fully discounted such a move before the data.
The bank forecasts inflation to slow to about 3% by the middle of 2023, and to come down to its 2% target next year.
Excluding food and energy, prices rose 4.9% compared with a rise of 5.3% in December.
The average of two of the central bank's core measures of underlying inflation, CPI-median and CPI-trim, came in at 5.1% compared with 5.3% in December.
"It gives them (the Bank of Canada) somewhat greater comfort in their decision to go on pause at least temporarily," said Doug Porter, chief economist at BMO Capital Markets. "A low-side inflation read will definitely prove to be a nice antidote to some of those high-side surprises."
Adding to the favorable base effect, cellular services fell 7.9% annually in January after increasing 2.5% in December, and consumers paid 6.2% more for passenger vehicles compared with 7.2% in December.
Mortgage interest costs, on the other hand, rose 21.2% annually in January, the largest increase since 1982, while food prices rose 10.4%, slightly faster than the 10.1% in December.
The Canadian dollar was trading 0.4% lower at 1.35 per U.S. dollar, or 74.07 U.S. cents.
