OTTAWA, June 27 Reuters Canada39;s annual inflation rate came in at 3.4 in May, its slowest pace in two years, data showed on Tuesday, weakening the case for another hike next month.

Analysts polled by Reuters had expected annual inflation to drop to 3.4 from 4.4 in April. Month over month, the consumer price index was up 0.4, Statistics Canada said, a tick below forecasts for a 0.5 rise.

The annual rate, which benefited from a comparison to last May39;s strong price increases, is the slowest since June 2021 and broadly in line with the Bank of Canada39;s expectation that inflation would cool to around 3 by mid2023.

The central bank hiked its overnight rate to a 22year high of 4.75 earlier in June after a series of surprisingly strong data, including an unexpected uptick in April inflation, which showed that the economy was running hotter than anticipated.

After the last rate increase, the Bank of Canada said it would be gauging economic data to decide whether to keep raising borrowing costs.

With the labour market also loosening in May, the case for another rate hike in July is not quite as strong as it seemed a few weeks ago, said Stephen Brown, deputy chief North America economist at Capital Economics.

The average of two of the Bank of Canada39;s core measures of underlying inflation, CPImedian and CPItrim, came in at 3.9 compared with 4.3 in April.

Canadians have continued to renew and take new mortgages at higher interest rates, resulting in the mortgage…