By Randall Palmer OTTAWA, May 20 (Reuters) - Canadian inflation stayed above the Bank of Canada's target range for the second straight month in April but came in below market forecasts, reducing some of the pressure on the central bank to raise interest rates. Statistics Canada data on Friday showed inflation rose 3.3 percent on an annual basis, unchanged from a month earlier and slightly lower than the 3.4 percent forecast by analysts surveyed by Reuters. Core inflation, which strips out volatile items, fell to 1.6 percent on an annual basis from 1.7 percent a month earlier, in line with market expectations. Analysts said the data helped cool inflation concerns sparked a month earlier by the March report, showing the annual inflation rate jumping to its highest since September 2008 and above the central bank's target range of 1 percent to 3 percent. "It justifiably reverses the knee-jerk reaction to the last (inflation) report and restores a bit of sanity to the Bank of Canada outlook," said Derek Holt, an economist with Scotia Capital in Toronto. "This confirms the upside to inflation in the prior report was a one-off effect ... I would think right now the risk to our (interest rate increase) call, if anything, is taking it out further for the year as a whole." Overnight index swaps, which trade based on expectations for the key central bank rate, showed that after the data traders priced in a reduced probability of rate increases at every announcement date this year from July to December. BOCWATCH The decline in rate hike expectations weighted on the Canadian dollar. It eased to a session low of C$0.9690 to the U.S. dollar, or $1.0320, from around C$0.9668 to the U.S. dollar, or $1.0343 just before the report. Both the market and the central bank had expected overall inflation to stay elevated. Bank of Canada Governor Mark Carney predicted on Monday that inflation would remain above the target range throughout the second quarter but said inflation expectations remained well-anchored. "Core (inflation) looks to be bang on expectations. Headline a little bit light, but largely as expected." said Benjamin Reitzes, an economist with BMO Capital Markets in Toronto. "This reinforces the fact that there is really no urgency for them (the Bank of Canada) to move just yet. They don't feel any urgency and this won't create any for them." The Bank of Canada was the first central bank in the Group of Seven advanced economies to begin raising interest rates last year. But it has kept its rate unchanged at 1 percent since September pending more evidence the global recovery is cemented. With economic growth gathering momentum and inflationary pressures re-emerging, markets had been divided on the timing of the bank's next move. [CA/POLL] Energy, up 17.1 percent year-on-year, and especially gasoline, up 26.4 percent, were the main components of above-average inflation. Food rose 3.3 percent on the year but fell 0.2 percent from March. Overall prices rose 0.3 percent in April from March, led by a 6.4 percent jump in gasoline. This was less than the 0.5 percent increase predicted by analysts.

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