Canada’s annual inflation rate checked in at 2.2% in July, down from the 2.6% yearly increase seen in June.

Statistics Canada said July’s 12-month inflation figure was the lowest the country has seen in a year.

The lower-than-expected reading leaves the Bank of Canada room to cut interest rates again if necessary.

Headline inflation was up just 0.1%, and core inflation was unchanged. The annual core rate is now down to just 1.8%, with the headline inflation rate down to 2.2% from 2.6% in June.

“The big news in the CPI report was the 5% drop in beef prices, which reflected heavy discounting following the mad cow scare and beef export ban, and accounted for much of the moderation,” noted BMO Nesbitt Burns. “Beef prices are included in the Bank’s measure of core inflation. As well, auto prices fell 0.9% on aggressive discounting. Neither of these is likely to reverse soon. These declines almost fully offset upward pressure from gasoline prices, and a rebound in men’s clothing costs.”

“This morning’s Canadian consumer price report was the final nail in the coffin for any lingering inflation concerns on this side of the border — and virtually locks in another interest-rate cut from the Bank of Canada at its next fixed-announcement date on September 3rd,” said TD Bank.

“Looking ahead, the Bank of Canada’s measure of core inflation is set to remain below the 2% target all the way through to mid-2004 — and could well be bumping against the bottom of the Bank’s 1%-3% band in the opening months of next year,” TD concluded. “Notably, the Canadian economy is likely to be operating with a substantial amount of excess slack by the end of 2003 — to say nothing of the impact of the sharp rise in the Canadian dollar, which may also have been a factor keeping inflation at bay over the past few months.”

CIBC World Markets said it expects to see sub-2% core inflation for the balance of the year, with year-over-year rates hitting their trough in early 2004, before seeing a gradual upturn on the back of improved economic performance. “As one of the last key economic releases before September 3rd, this noticeably tamer-than-expected report has helped solidify expectations of a looming 25 bps rate cut by the Bank of Canada,” it said.

“Note that the Bank had been looking for core inflation to average 2.1% in the third quarter. That forecast now looks clearly too high, giving Dodge & Company ample wiggle room to address the economy’s growth shortcomings.”

Nesbitt also sees a cut “With core inflation now below target, the Bank of Canada has a free hand to trim rates again if they see fit. It remains a close call, but the odds favour one more rate cut on September 3rd,” Nesbitt said.