* Canadian dollar near flat against the greenback
* Loonie touches a five-week low at 1.3120
* Canada's inflation rate falls in September to 2.2 percent
* Canada-U.S. 10-year spread widens to most in nearly three months
By Fergal Smith
TORONTO, Oct 19 (Reuters) - The Canadian dollar steadied against the greenback on Friday, but held near a five-week low hit after domestic data showing a slowdown in inflation was supportive of the Bank of Canada maintaining a gradual approach to interest rate hikes.
The annual inflation rate in September dipped to 2.2 percent from 2.8 percent as price pressures from gas and air travel eased. Analysts had forecast an annual rate of 2.7 percent. central bank's three core inflation measures all fell, for the first time since November 2016.
"This should really quell a lot of speculation that the Bank of Canada will move away from the gradual path of tightening," said Andrew Kelvin, senior rates strategist at TD Securities.
The central bank said in September that it had discussed dropping its gradual approach to raising rates. A faster pace of tightening could boost the loonie.
Money markets still expect the Bank of Canada to lift its policy rate by 25 basis points next week to 1.75 percent, but the amount of tightening seen by March slipped to 51 basis points from 55 basis points before the data. BOCWATCH
Separate data showed that the value of Canadian retail trade unexpectedly fell by 0.1 percent in August, the second decline in three months.
The loonie had been trading higher ahead of the data as oil prices rebounded. After the data it slumped to its weakest since Sept. 11 at 1.3120 before recovering.
At 9:44 a.m. (1344 GMT), the Canadian dollar CAD=D4 was trading nearly unchanged at 1.3090 to the greenback, or 76.39 U.S. cents.
The price of oil, one of Canada's major exports, rose on signs of surging demand in China, the world's second-biggest oil consumer. Still, the market was heading for a second week of losses on rising U.S. inventories and concern that trade wars were curbing economic activity. crude CLc1 prices were up 0.9 percent at $69.26 a barrel.
Canadian government bond prices were higher across the yield curve, with the 10-year CA10YT=RR rising 31 Canadian cents to yield 2.462 percent.
The gap between the 10-year yield and its U.S. equivalent widened by 6 basis points to a spread of 73 basis points in favor of the U.S. bond, the biggest gap since July 23.