UPDATE 3-Canada December inflation holds at 3-year low of 0.8 pct
* No pressure for rate hikes
* Inflation rate well below central bank's target
* Canadian dollar sinks to 6-month low
OTTAWA, Jan 25 (Reuters) - Canada's annual inflation rate in December remained at a three-year low of 0.8 percent, emphasizing how little pressure there is on the Bank of Canada to raise interest rates, Statistics Canada data indicated on Friday.
The rate is the lowest since 0.1 percent recorded in October 2009 and is far below the Bank of Canada's 2.0 percent target. Market analysts had expected the annual rate to increase to 1.2 percent from November's 0.8 percent.
"I think it just reinforces the view that the Bank is locked on the sidelines for a lengthy spell here," said Doug Porter, deputy chief economist at BMO Capital Markets.
Consumer prices in December fell by 0.6 percent from November, which Porter attributed to seasonal discounting and lower prices for gasoline.
The Bank of Canada on Wednesday cited soft inflation as one of the reasons why a rate hike would be less imminent than it has previously anticipated. A Reuters poll conducted later the same day showed most of Canada's primary dealers expect the next rate hike in the first quarter of 2014.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders decreased their already small bets on a rate hike in late 2013.
The central bank said in a statement on Wednesday that total and core inflation should return to its 2 percent target in the second half of next year, not the end of this year as it once thought.
The statement "was a bit of a surprise for the market, given that they had that dovish tone, so certainly the bank has been a little bit vindicated in that case," said TD securities strategist Mazen Issa.
The Bank predicts inflation averaging just 0.9 percent in the first quarter of 2013, the first time it has projected a rate below its 1-3 percent target band since 2009.
Food prices rose by 1.5 percent in the 12 months to December, down from the 1.7 percent year-on-year change in November. Gasoline prices rose by 1.0 percent in December, up from the 0.4 percent year-on-year advance seen in November.
The central bank's closely watched annual core inflation rate, which strips out the prices of items such as gasoline and some foodstuffs, dropped to 1.1 percent from 1.2 percent in November. On a monthly basis, the core rate fell by 0.6 percent from November.
The inflation data helped push the Canadian dollar down to a six-month low against the U.S. dollar.
The currency hit C$1.0092 to the U.S. dollar, or $0.9909 soon after the data release, compared to C$1.0065 just before and a Thursday close of C$1.0029. By 9:40 a.m. EST (1440 GMT) it had recovered to C$1.0073, or $0.9928.
"All in all, it's a Canadian dollar-negative release as it will push out the expectation for Bank of Canada rate hikes further into the future," said Camilla Sutton, chief currency strategist at Scotiabank.
Statscan said the annual average increase in consumer prices in 2012 was 1.5 percent, down from 2.9 percent in 2011 and the lowest since the 0.3 percent recorded in 2009. The average of the annual increases in the consumer price index since 1992 is 1.8 percent.