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.
Yields on overnight index swaps, which reflect market expectations of the key policy rate, edged higher after the report to suggest a 57.5 percent chance the bank will raise rates by 25 basis points in June, but later eased to 54.5 percent.
A Reuters poll on Friday showed the country's primary securities dealers were sticking to predictions of a rate increase on June 1, but cautioned that the outlook could change if the euro zone situation took a sharp turn for the worse. Some who had called in early May for more aggressive 50 basis point moves were less hawkish.
Analysts argue that domestic data has almost become a sideshow now that markets are gyrating violently over the Greek debt crisis and broader sovereign debt concerns elsewhere.
"It really comes down to the European credit situation and financial markets, whether they can settle down over the next week. I think the Bank of Canada is probably more focused on that situation than the inflation story right now," said Sal Guatieri, senior economist at BMO Capital Markets.
Prime Minister Stephen Harper said on Friday that Canada's economy remained "very strong" but was at risk from external threats.
"We are aware of the uncertainty that exists in other markets and the potential of that to affect us," he told a televised news conference in Niagara Falls, Ontario.
Unlike the United States, where consumer prices unexpectedly slipped in April, they rose 0.3 percent in Canada versus an analyst forecast of 0.2 percent.
In the year through April, gasoline prices contributed most to the rise in CPI, while natural gas prices rose for the first time in a year. Seven of the eight components of the CPI showed price increases, with clothing and footwear being the only group to decline.
The sizzling retail numbers for March are the latest in a string of data suggesting economic growth could be even faster than the 5 percent annualized rate seen in the final quarter of last year.
"Given previously reported gains in the volumes of wholesale and manufacturing sales, today's report suggests that GDP rose by a solid 0.5 percent in March ... This suggests some upside risk to our current forecast that GDP, on a quarterly expenditure basis, rose 5.5 percent in the first quarter of 2010," economist Nathan Janzen of RBC Economics wrote in a note to clients.
Additional reporting by John McCrank, Ka Yan Ng, Jennifer Kwan and Claire Sibonney in Toronto, and David Ljunggren in Ottawa; editing by Rob Wilson