OTTAWA, March 18 (Reuters) - Canadian retail sales rebounded strongly in January, boosting the likelihood that growth in the first quarter will be better than anticipated giving the Bank of Canada room to stay on the sidelines.
Separate data showed a slowdown in the annual inflation rate in February, as a drop in gasoline prices pulled inflation down from the mid-point of the bank's target.
Economists on Friday were focused on Statistics Canada's retail sales report, which showed a 2.1 percent increase. That exceeded analysts' expectations and recovered December's similar decline. Excluding the auto sector, sales were up 1.2 percent, while overall volumes gained 2.1 percent.
"The retail sales number was a barnburner," said Nick Exarhos, economist at CIBC Capital Markets.
Consumers had cut back their spending in December in the midst of unseasonably warm weather but five sectors bounced back in January from lower end-of-year sales.
Motor vehicle and parts dealers' sales jumped 4.8 percent, the sector's third gain in four months as sales at new car dealers rose.
Following strong manufacturing figures earlier in the week, the retail sales bolstered expectations first-quarter growth will surpass the Bank of Canada's 1 percent forecast. The central bank cut interest rates twice last year to offset the oil price shock, but has held steady so far in 2016.
"This looks like a good report to us," said Andrew Kelvin, senior rates strategist at TD Securities. "This I think vindicates to an extent the Bank of Canada decision to stay on hold in January."
The Canadian dollar added to gains against the greenback shortly after the reports.
Annual inflation was 1.4 percent in February, modestly exceeding analysts' expectations for a pullback to 1.5 percent from January's 2.0 percent, data from Statistics Canada showed.
Gasoline prices were the biggest driver of the deceleration, resuming their decline with an annual 13.1 percent drop after increasing in January on a year-over-year basis.
But prices still rose in six of the index's eight major components, led by higher costs for food and shelter.
Core inflation, which strips out some volatile items and is watched by the Bank of Canada, was more robust than the main consumer price index, edging down to 1.9 percent from 2.0 percent.
The bank said earlier this month that it expected the factors that had pushed overall inflation up to 2 percent recently would likely be unwound in the months ahead.
Additional reporting by Fergal Smith in Toronto Editing by W Simon