By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) -Canada’s annual inflation rate eased in March to 4.3%, its slowest pace in 19 months but still more than double the Bank of Canada’s 2% target, data showed on Tuesday.

The headline inflation figure fell from 5.2% in February, matching expectations, as a decline in energy prices helped offset a record spike in mortgage costs, Statistics Canada data showed on Tuesday.

“Inflation hasn’t been running this slow since 2021, but that’s still not enough to satisfy Canadian central bankers who are laser-focused on returning price growth to its 2% target,” said Royce Mendes, head of macro strategy at Desjardins Group.

Month-over-month, the consumer price index was up 0.5%, also in line with forecasts. Gasoline prices fell for a second month in a row on an annual basis. Food prices gained 9.7% annually in March, down from 10.6% in February.

Last week, the Bank of Canada (BoC) held its benchmark interest rate at 4.50%, as expected, but struck a hawkish tone, playing down market expectations for a rate cut this year as the risk of a recession diminished.

“Inflation is coming down quickly – data this morning show it fell to 4.3% in March,” BoC Governor Tiff Macklem said in testimony in the House of Commons. Last week, the bank projected that headline inflation would cool to about 3% by mid-2023.

“Continued strong demand and the tight labour market are putting upward pressure on many services prices, and those are expected to decline only gradually,” keeping the headline figure from hitting 2% until the end of 2024, Macklem added.

Services prices rose 5.1% annually in March, while the price of goods increased by 3.6%, Statscan data showed. The March inflation reading benefited from a comparison to last year’s strong price increase.

The average of two of the BOC’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 4.5% compared with 4.9% in February.

“I would characterize this as modestly good news,” said Doug Porter, chief economist at BMO Capital Markets. “We did see the expected come down in all the core measures. Things are mostly unfolding as expected.”

Price rises of store-bought food slowed to 9.7% in March, falling below 10% for the first time in eight months. Excluding food and energy, prices rose 4.5% compared with a rise of 4.8% in February.

Energy prices declined 6.9% annually in March while mortgage interest costs surged 26.4% annually, the largest yearly increase on record, as Canadians continued to renew and initiate mortgages at higher interest rates, Statscan said.

The Canadian dollar was trading 0.1% higher at 1.3385 to the greenback, or 74.71 U.S. cents.

(Reporting by Ismail Shakil, Steve Scherer and Dale Smith in Ottawa, Fergal Smith in Toronto; editing by Chizu Nomiyama, Susan Fenton, Mark Heinrich and Jonathan Oatis)

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