March 31, 2016 / 12:43 PM / a year ago

UPDATE 2-Canada growth jumps in January, dimming chances of rate cut

(Adds reaction, details, background, jump in Canadian dollar)

By David Ljunggren

OTTAWA, March 31 (Reuters) - Canada's economy grew by a much larger-than-expected 0.6 percent in January, Statistics Canada data indicated on Thursday, reducing the odds that the Bank of Canada will need to cut interest rates further this year.

Market operators polled by Reuters had forecast a 0.3 percent increase from December. January's gain - the fourth in a row - was the largest since the 0.6 percent advance seen in July 2013.

The Bank of Canada, which cut rates twice last year to help counter the effects of a slump in oil prices, is currently predicting first quarter growth of just 1 percent. The January data suggests first-quarter growth could be markedly higher.

"This eliminates any risk of any near-term easing with growth coming in stronger than expected ... the Bank (of Canada) will take encouragement," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

"However, there may be some payback as we move forward. We are getting indications that the energy sector remains weak," he said in a phone interview.

Statscan said manufacturing, retail trade, mining, quarrying and oil and gas extraction were major contributors to growth in January. The output of goods-producing industries rose by 1.2 percent while service-producing industries rose by 0.4 percent.

Output in the manufacturing sector - which was pummeled by a high Canadian dollar and weak markets after the 2008 financial crisis - expanded by 1.9 percent in January.

The Canadian currency weakened markedly as oil prices slid, making exports more competitive. The Bank of Canada says it expects to see the economy shift towards non-resource sectors as the energy sector continues to struggle.

The Canadian dollar rose to a five-month high on the data, strengthening to C$1.2887 to the U.S. dollar, or 77.60 U.S. cents, after opening at C$1.2967, or 77.12 U.S. cents.

"2016 is off to a roaring start," CIBC Economics analyst Nick Exarhos said in a note to clients. "The monthly gain in January has us looking for a first quarter growth pace in the order of 2.5 percent to 3 percent."

The central bank's next rate announcement is on April 13, when it will also release an updated economic forecast including an appraisal of how much the government's stimulus-heavy March 22 budget will contribute to growth.

Canada will take more than two years to adjust fully to the drop in oil prices, a senior Bank of Canada official said on Wednesday.

Additional reporting by Fergal Smith in Toronto; Editing by Nick Zieminski

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