Better-than-expected Canada growth boosts rate hike prospects

OTTAWA (Reuters) - Canada’s economy shrugged off the effects of bad weather to post unexpected growth in April and business optimism rose to near record levels in the second quarter, pushing up the Canadian dollar and boosting odds of an interest rate hike next month.

FILE PHOTO: New condominium towers are seen under various stages of construction in the Yaletown district of downtown Vancouver, British Columbia, Canada, November 19, 2016. REUTERS/Chris Helgren/File Photo

Statistics Canada said on Friday that GDP rose by 0.1 percent from March, the seventh time in the last eight months that the economy has expanded. Analysts in a Reuters poll had predicted no change.

A separate report from the Bank of Canada showed widespread optimism among corporate Canada in the second quarter, with companies reporting rising pressure on capacity and prices, along with labor market shortages, because of strong demand.

Together, the two reports reinforce market expectations that the central bank will raise rates in July for the fourth time in 12 months. The chance of a rate hike at the July 11 announcement jumped to almost 80 percent from 67 percent, the overnight index swaps market indicated.

Stephen Poloz, the central bank’s governor, on Wednesday said economic data would decide the next move.

“This certainly doesn’t hurt the case for a hike (in July) with growth beating expectations and with Statistics Canada sounding fairly aggressive that it would have been stronger yet if it were not for adverse weather effects,” said Derek Holt, vice president of capital markets economics at Scotiabank.

“I think the bank is going in July,” he said by phone.

Colder-than-normal temperatures, including an ice storm across central and eastern Canada, helped cut retail trade by 1.3 percent. Construction declined by 0.5 percent.

Manufacturing rose by 0.8 percent from March on higher output of machinery as well as food products and chemical products.

The Canadian dollar strengthened to a 10-day high against its U.S. counterpart. Shortly after the data release, it was trading 0.4 percent higher at C$1.3200 to the greenback, or 75.76 U.S. cents.

Separately, Statscan said Canadian producer prices rose by 1.0 percent in May from April, the fifth consecutive increase, on higher prices for energy and petroleum products.

Of the 21 major commodity groups, prices were up in 17 and down in one, leaving three unchanged. The advance was the greatest since the 1.5 percent jump seen in November 2017.

With additional reporting by Andrea Hopkins in Ottawa and Fergal Smith in Toronto; Editing by Bernadette Baum and Susan Thomas