TORONTO Canada's annual inflation rate slowed to 3.4% in May on lower prices for gasoline as a result of the base-year effect, while mortgage interest costs remain high, Statistics Canada said on Tuesday.

This was in line with what analysts polled by Reuters had expected, down from 4.4% in April.

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COMMENTARY

STEPHEN BROWN, DEPUTY CHIEF NORTH AMERICA ECONOMIST, CAPITAL ECONOMICS

"While the steep declines in both headline and core inflation in May were partly due to favourable base effects, the monthly gains in each also slowed compared to April. That probably won't be enough to persuade the Bank of Canada to stand pat at its meeting next month, but it does add to our sense that the Bank will not be forced to raise interest rates beyond 5.0%, implying just one more 25 basis-point hike."

ANDREW GRANTHAM, SENIOR ECONOMIST, CIBC CAPITAL MARKETS

"While inflation was no weaker than the consensus expectation in May, some signs of tamer core price pressures could provide a bit of breathing space for the Bank of Canada as it decides if, or when, to raise interest rates again."

"Overall, today's data don't change the fact that inflation is running hotter than the Bank's prior April MPR forecasts. However, the tamer core readings suggest that policymakers may be able to wait a little longer rather than following up June's hike with another move as early as July."

MICHAEL GREENBERG, SVP, PORTFOLIO MANAGER, FRANKLIN TEMPLETON INVESTMENT SOLUTIONS

"Headline 3.4(%), is right at market expectations. The sound bite will be that we are now solidly in the threes which we haven't seen in two years. So from that perspective that's a good thing, but also more importantly for the Bank of Canada some of the core measures that they focus on, core CPI, trimmed mean, weighted median et cetera have all also decreased and are moving in the right direction."

"The Bank of Canada's move from fighting inflation at all costs to one that's where they're really trying to thread the needle and getting inflation down and into the range but also not tanking the economy."

"We're not sure that they're going to get out of bed from their previous pause to just hike once. So we would expect July be reasonable to hike one more time and then maintain on hold unless of course the data over the next couple of weeks really materially slows."

DEREK HOLT, VICE PRESIDENT OF CAPITAL MARKETS ECONOMICS AT SCOTIABANK

The CPI reading "might give the bank Canada some reason to skip July at the margin. Unless we get really big surprises on what's left between now and then like jobs, wages and the bank surveys, then I think most information we have now they're more likely to adopt the fine tuning approach whereby they don't have to go in a straight line, and they can evaluate the data at the margins. This data is a little bit more encouraging judged through their lens."

"I think they're very data dependent. We still have one more quarter point hike in our forecasts. We've it in Q3....it can be either in July or September. We wanted to see the data to firm up that call. This is like past fine tuning exercises when they - either in going up or coming back down - when they've reasoned that, 'Listen, we need to spread out these fine tuning adjustments'... And I think that's perhaps a sensible approach at this point in the cycle."

(Reporting by Steve Scherer, Fergal Smith; Editing by Denny Thomas)