By David Ljunggren
OTTAWA (Reuters) - Tame Canadian inflation figures on Friday lent support to the central bank's stance of keeping interest rates ultra-low, but surprisingly upbeat retail sales data signaled pockets of economic vitality.
Statistics Canada said annual inflation in October dipped below the Bank of Canada's target range, dropping to a five-month low of 0.7 percent from 1.1 percent in September. Analysts had expected a rate of 0.9 percent.
But separate data out on Friday also showed retail sales were three times stronger than expected in September, driven by booming auto demand.
The Bank of Canada, which aims to keep inflation near the middle of its 1 to 3 per cent target range, has kept its key overnight interest rate at a near-record low of 1 percent since September 2010 in an effort to spur economic growth.
Last month, citing the below-par economy and a struggling export sector, the central bank removed its credit tightening bias and made clear that rates would not be going up any time soon.
"There's little reason to believe that inflation will pick up meaningfully anytime soon ... there's also little reason to believe the Bank of Canada will even consider raising rates anytime in the next year," BMO Capital Markets chief economist Doug Porter said in a note to clients.
Most primary dealers predict the bank will hold rates steady well into 2015, according to a Reuters poll.
Gasoline prices fell by 4.3 percent in the year to October after a 0.3 percent drop in the 12 months to September. Lower gasoline prices were recorded in all of Canada's 10 provinces.
The bank's closely watched annual core inflation rate, which strips out the prices of more volatile items such as energy and some foodstuffs, dipped to 1.2 percent in October from 1.3 percent in September.
The muted inflation data was offset to a degree by stronger-than-expected retail figures for September, when sales grew by 1.0 percent from August.
The advance - greater than the 0.3 percent increase foreseen by market operators - marked the third consecutive month that retail sales have risen. The last three-month growth streak was from September to November 2012.
The Canadian dollar
The retail figures masked some weakness in the economy, since growth was entirely reliant on motor vehicles and parts dealers. Growth was flat once this sector was stripped out.
"A very stretched consumer is somehow finding the room in a slowing job growth, rising rates, and weak credit-growth environment to keep on spending at a decent clip," said Derek Holt and Dov Zigler of Scotiabank Economics.
"Retailers may be in a position whereby they have to offer price and inflation concessions in order to keep consumers spending, which is encouraging volumes at the expense of margins that are increasingly under pressure," they said in a note.
Graphic: Canada retail sales http://link.reuters.com/muv74t
(Additional reporting by Leah Schnurr in Toronto; Editing by Jeffrey Hodgson; and Peter Galloway)