Declining inflation provides ample scope for the Bank of Canada to keep cutting interest rates, says BCA Research.

The core consumer price inflation rate dropped to 1.6% in November, continuing a downtrend underway since mid-year, the independent research firm notes.

“The core rate is now well below the 2% mid-point of the BoC’s target range. While the headline inflation rate ticked higher on the back of soaring gasoline prices, the overall inflation picture is encouraging as the benefits of the strong Canadian dollar flow through to domestic prices,” it says.

“Retail price inflation is trending lower and will likely dip into negative territory in the months ahead as cross-border shopping and import competition weigh on domestic goods prices,” BCA predicts.

“The favorable inflation outlook affords the BoC scope to reduce interest rates further to counter the threats of a slowing U.S. economy and tightening credit conditions on Canadian growth,” it concludes. “Another BoC rate cut looms in early 2008.”