June rate hike still an option after Canada data

Fri May 21, 2010 1:16pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canadian consumer prices rose in April and March retail sales raced past expectations, suggesting considerable strength in the economy and keeping alive the possibility of a June rate hike by the central bank.

Investors have hedged their bets on the Bank of Canada's next move on fears over Europe's debt problems, but data released by Statistics Canada on Friday adds slightly more pressure on the bank to raise rates as early as possible.

Inflation came in higher than expected in April at 1.8 percent, up from 1.4 percent in March, mainly due to rising gasoline prices. The closely watched core rate jumped to 1.9 percent, nudging up against the central bank's 2 percent target.

"I think many in the market were looking for a soft figure that would provide easy cover for the Bank of Canada to pause on June 1. Unfortunately, that outcome did not manifest itself," said Eric Lascelles, chief Canada macro strategist at TD Securities.

"The Bank of Canada still has a real struggle here in terms of figuring out what to do in June. It will remain data dependent with retail sales and GDP, and it will remain very euro-focused as well, and I suspect we won't know the answer until 9 a.m. on June 1," Lascelles said.

Retail sales in March posted their biggest monthly gain in five years, jumping 2.1 percent from February as consumers spent heavily on motor vehicles.

The Canadian dollar fought back from a 14-week low against the U.S. currency, touching a high of C$1.0562 to the U.S. dollar, or 94.68 U.S. cents, up from a low of C$1.0753 to the U.S. dollar earlier in the session.

The Statscan reports may prompt Bank of Canada Governor Mark Carney to look to tighten monetary policy now to prevent the economy from eventually overheating, although the cloudy outlook could hold him back for fear of choking the recovery.   Continued...

<p>A gasoline pump nozzle is seen at a gas station in this 2008 file photo. REUTERS/Jim Young</p>