Economists and the Bank of Canada were both greeted with lower than expected consumer inflation numbers Thursday morning, suggesting that interest rate hikes are done for now.

The consumer price index dropped 0.7% in April, economists were calling for a 0.2% drop. This pulled the annual rate all the way back to 3.0% from 4.3% in the prior month.

“After running hot for more than a year, Canada’s inflation rate cooled dramatically in April,” noted BMO Nesbitt Burns. “While there were special factors involved, the overriding story in this report was the surprisingly muted inflation readings almost across the board.”

Falling energy prices were the biggest factor, as gas prices fell 9%, fuel oil dropped 18% and electricity prices slid 10%. Still, the core inflation rate also fell sharply, dropping to 2.1% from 2.9% in March.

RBC Financial says that April’s data does not take into account several newly emerging downward pressures on Canadian prices too. “The recent strong gains in the exchange rate will take some time to pass through to the general price level and will exert downward pressure on import prices in the coming quarters. The persistent sluggishness in the U.S. economy means it is significantly farther away from any capacity pressures than was expected earlier this year. Finally, the effect of price discounting from the SARS episode in Toronto will impact the numbers from May onward.”

“With these factors and others such as mad-cow disease in the picture, the Bank of Canada is expected to hold rates steady until late in the year,” RBC predicts.

CIBC World Markets says, “Today’s notably tamer-than-expected CPI report has effectively killed the prospect of further Bank of Canada rate tightening in coming months. Still, it’s a little premature to start the talk of Bank easing. They’ll need more than one downside inflation surprise, and hard evidence that the economy is meaningfully backing away from capacity limitations, before switching into easing mode.”

Nesbitt says that “this report marks an important break in Canada’s inflation picture.” And, it predicts that the Bank of Canada will now be quite comfortable on the sidelines.