March 20, 2015 / 2:08 PM / 2 years ago

WRAPUP 1-Canada retail sales slump, inflation holds steady

OTTAWA, March 20 (Reuters) - Canadian retail sales dropped more than expected in January due to lower prices at the gasoline pump, suggesting the economy may have had a weaker start to 2015 than anticipated.

Statistics Canada also said on Friday that the annual inflation rate in February was pressured by cheap gasoline as well, holding steady at 1 percent, matching expectations, and at the low end of the Bank of Canada's target range.

Analysts said inflation at that level is unlikely to push the central bank to make an interest-rate move, though the drop in retail sales makes the path of monetary policy less clear.

The 1.7 percent sales drop surpassed expectations for a 0.7 percent decline. In volume terms, sales dropped 1.2 percent.

"I think you spell 'ugly' with retail sales this month," said David Tulk, chief Canada macro strategist at TD Securities.

"The weakness in retail sets up industry level (gross domestic product) to contract, which puts the first quarter (growth) at risk of falling below 1 percent."

Low prices pulled gasoline sales down 8.8 percent, the largest decline since November 2008.

The Canadian dollar retreated against the greenback immediately following the two reports before recovering some gains.

At 1 percent, inflation in February matched January's figure, which was the lowest level since November 2013. The Bank of Canada, which has a target range of 1 percent to 3 percent, expects inflation to be below 1 percent for much of this year.

Core inflation, which strips out gasoline and other volatile items and is closely watched by the bank, edged down to 2.1 percent from 2.2 percent.

The bank unexpectedly cut interest rates to 0.75 percent in January. While analysts suspect another cut may come this year, markets are pricing in around a 60 percent chance the bank will hold steady at its policy meeting in April.

"I think it will keep the Bank of Canada just monitoring the data," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

"Some of the pressure on gasoline looks like it will reverse in March, but it's the core measure that's key, and still suggesting inflation pretty close to their mid-range target."

Lower gasoline prices were the largest downward contributor to the consumer price index in February. They were down 21.8 percent year-on-year. In January, they were down 26.9 percent. (Additional reporting by Allison Martell and Andrea Hopkins in Toronto; Editing by Peter Galloway)

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