A smaller increase in the price of gasoline meant Canada’s annual inflation rate for March came in at 1.4%. Statistics Canada reported today. That’s the lowest growth rate since January 2007.

The inflation rate has now slowed for four consecutive months, the StatsCan said.

February’s 12-month inflation rate was 1.8%.

The one-year change in the Bank of Canada’s core index, which factors out volatile elements such as food and energy, was 1.3% in March, down from the 1.5% increase in February.

This slowdown in core inflation was mostly a result of lower prices for automotive vehicles, the government agency said.

The main factor pushing prices up in March was higher mortgage interest costs, which rose 8.3%.

“The upswing in prices of new housing in March continued to put more upward pressure on mortgage interest cost than the change in interest rates,” StatsCan said.

Prices at the gasoline pumps rose by 7.9% from March 2007 to March 2008, but that was less than half the annual rate of growth of 17.1% posted for February. Gasoline prices in March were still the second-largest contributor to the overall inflation rate.

The price of fuel oil and other fuels jumped almost 30% in the 12 months to March 2008. This was the steepest jump in prices since September 2005, when hurricanes Katrina and Rita hit the United States, producing a sharp spike in prices.

Rising world prices for wheat pushed the cost of bakery products up by 9% in the 12 months to March 2008.

Taking off some of the upward pressure on the inflation rate was a 7.1% slide in the cost of purchasing and leasing vehicles, following a 6.8% in drop in February. Dealer incentives and lower prices helped ease costs in this sector.

Lower year-over-year prices were also seen for computer equipment and supplies, fruits and vegetables, and women’s clothing.

Today’s benign inflation report clears the way for an expected 50 basis point rate cut from the Bank of Canada next week.

“Both the core and all-items inflation rates ended the first quarter near the low end of the Bank of Canada’s 1% to 3% target band, giving the Bank leeway to keep policy geared toward mitigating the downside risks to Canada’s economy coming from the steady weakening in the pace of U.S. economic growth and the rising cost of capital,” RBC Capital Markets says.

“We expect the downside risks to the economic outlook to hold sway at next week’s meeting of the Bank’s Governing Council and look for a 50 basis-point cut in the target for the overnight rate to be announced,” it adds.

National Bank Financial agrees that this was a good report from the central bank’s perspective, “as the strong Canadian dollar and ongoing price war among grocers continue to offset the global rise in energy and food prices.”It also sees another 50 bps cut next week.

“For the Bank of Canada, what matters most is the core inflation outlook, with policy anchored to the 2% target,” adds TD Economics. “Even assuming very little further currency pass-through, inflation is likely to remain under wraps for a while as the economy slows,” it says.

With the low inflation outlook, “This gives it more leeway to cut interest rates than its counterparts in other countries,” TD says. “Add to that an economic and financial outlook which has deteriorated since January along with a correspondingly dovish tone emanating from Wellington Street headquarters in Ottawa, and you have a recipe for another ‘super sized’ 50 basis points cut in the overnight rate come Tuesday.”

BMO Capital Markets, says, “This benign report simply reinforces the point that Canadian inflation remains an oasis of calm amid raging global price pressures. The loonie at par remains the dominant factor holding back the tidal surge in commodity prices. While price trends may begin to bottom out and head higher in the months ahead, the muted trend in core inflation and the mild headline rate continue to give the Bank of Canada ample room to manoeuvre on the rate-cut front. This result does nothing to reduce the odds of a 50 bps slice next week.”

Morgan Stanley is also looking for a 50 bps cut from both the Bank of Canada, and from the U.S. Federal Reserve Board at its meeting the following week.