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.

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.

“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 US cents.

Meanwhile the Canadian dollar weakened to a three-week low against its US counterpart on Friday as domestic retail sales data suggested that higher borrowing costs are taking a toll on the economy.

Canadian retail sales dipped by 0.2% in February from January, and are expected to drop another 1.4% in March, according to data from Statistics Canada.

“High mortgage rates are starting to bite Canadians’ wallets,” said Adam Button, chief currency analyst at ForexLive. “Canada is particularly sensitive to higher interest rates and that will lead to divergence in US and Canadian economic performance in the second quarter and beyond.”

The Bank of Canada has lifted its benchmark interest rate to a 15-year high of 4.50% to tackle inflation, leading to upward pressure on mortgage rates after a number of years in which Canadians borrowed heavily to participate in a red-hot housing market.

The Canadian dollar was trading 0.5% lower at 1.3545 to the greenback, or 73.83 US cents, after touching its weakest intraday level since March 31 at 1.3563. For the week, the currency lost 1.4% as investors raised bets on an interest rate hike next month by the Federal Reserve and the price of oil, one of Canada’s major exports, fell.

Oil clawed back some of its weekly decline on Friday, settling 0.7% higher at $77.87 a barrel.

Canadian government bond yields were lower across the curve. The 2-year dropped 6 basis points to 3.746%, while it was trading 8 basis points further below its US counterpart to a gap of about 44 basis points.

The Canadian dollar edged lower against its US counterpart on Thursday as oil prices fell and investors took some profit after recent moves higher for the currency. The loonie was trading 0.1% lower at 1.3475 to the greenback, or 74.21 US cents. It touched its weakest since April 12 at 1.3489 but was still up nearly 3% since mid-March.

After an “aggressive move” higher there is bound to be some profit-taking, said Bipan Rai, global head of FX strategy at CIBC Capital Markets.