March 31, 2015 / 12:42 PM / 2 years ago

UPDATE 2-Canada's economy shrank less than expected in January

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By Leah Schnurr

OTTAWA, March 31 (Reuters) - The Canadian economy shrank less than foreseen in January, Statistics Canada data showed on Tuesday, a report that reinforced economists' expectations that the central bank will hold interest rates steady in April.

Gross domestic product fell by 0.1 percent in the first month of the year as a rebound in oil and gas extraction offset service-sector weakness. That was shy of the decline of 0.2 percent that economists had expected, but it was still the second month in three that the economy has contracted.

Analysts said the report suggests modest growth in the first quarter, though there is still a risk of contraction with February likely to be weak.

"The big question is whether the second quarter rebounds as the Bank of Canada anticipates. That will likely be a key driver for monetary policy," said Benjamin Reitzes, senior economist at BMO Capital Markets.

After a surprise quarter-point rate cut in January in reaction to plunging oil, the central is expected to keep rates steady for now.

The January GDP report was watched for what impact the drop in the price of oil, a major Canadian export, was having on the economy. Oil and gas extraction reversed December's decline to rise 2.6 percent.

"There were no obvious effects from the oil shock in this report but we think February data will likely look worse, partly due to very poor weather," said Mazen Issa, senior Canada macro strategist at TD Securities.

Support activities for mining and oil and gas extraction fell 2 percent on declines in rigging services. The central bank has said the effects of cheaper crude could be most pronounced at the beginning of the year. Bank Governor Stephen Poloz said recently the first quarter will look "atrocious". .

The services sector was the biggest drag on the economy, falling 0.3 percent, its first decline in nearly a year. The decrease was driven by a 2.6 percent drop in wholesale trade, while retail trade fell by 1 percent.

Manufacturing output was off 0.7 percent as factories made fewer durable goods. Both residential and nonresidential construction fell, while activity of real estate agents and brokers sank, mainly due to a weak resale market in the commodity-sensitive provinces of Alberta and Saskatchewan.

The Canadian dollar pared losses against the greenback following the report, and was most recently trading slightly weaker. (Editing by Peter Galloway)

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