Tame inflation and Ottawa's decision to tighten mortgage rules have given the Bank of Canada more freedom to hold interest rates for some time yet.
Canada's annual inflation rate eased in May to 1.2 per cent, down significantly from the 2-per-cent pace of April, and the slowest since June, 2010, according to Statistics Canada figures released Friday.
That came just one day after Finance Minister Jim Flaherty tightened up mortgage regulations to help tame Canada's high consumer debt burden, also taking pressure off the central bank to try to slow borrowing by raising its benchmark overnight rate from its current low level of 1 per cent.
Coupled with that is a string of recent weak economic readings, from retail and manufacturing sales.
"This simply drives home the point that there is now precisely zero urgency to tighten," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns, referring to Friday's inflation report.
Bank of Canada governor Mark Carney was not expected to tighten policy soon at any rate, but economists now see him moving even later.
The so-called core rate of inflation, which excludes volatile items and helps guide the Bank of Canada, now stands at 1.8 per cent.
"Ottawa's significant step to tighten insured mortgages this week should address the bank's biggest domestic concern – the buildup of household debt, and the related strength in home prices," Mr. Porter said.
"This fourth round of non-rate tightening will act like a targeted rate increase, and should dampen the housing market in a timely manner. It was probably no coincidence that the measures were announced the very day after the Fed unveiled the extension of Operation Twist for another six months. The government had likely been assuming Bank of Canada rate hikes would act to dampen housing later this year; but with the Fed still moving in the opposite direction, any chance of 2012 Canadian rate hikes seemed to fly out the window."
An extension of the 1-per-cent overnight rate would stretch out the longest period of stable borrowing costs in Canada since the 1950s even further.
The 2.3-per-cent drop in year-over-year gasoline prices that pushed down inflation in May could also play into consumer prices over the next couple of quarters, Emanuella Enenajor, an economist at CIBC World Markets, said, but inflation will trend toward 2 per cent by the end of the year.