* Economy loses 1,500 jobs vs forecast of 26,500 gain
* Unemployment rate drops to 7.7 pct from 7.8 pct
* Little change to rate hike expectations (Adds analysts, market reaction)
By Louise Egan
OTTAWA, April 8 Canada's economy unexpectedly lost jobs in March, although a surge in full-time employment reflected solid growth and did little to change expectations that the central bank will hike interest rates later this year.
Statistics Canada reported on Friday net job losses of 1,500 in the month, the first decline since September and compared with expectations for a gain of 26,500 jobs.
Statscan considers any net gain or loss in jobs of less than 28,700 to be negligible. The average monthly job growth over the previous five months was 40,000, although gains in February were also tepid at 15,100.
The unemployment rate dropped in March to 7.7 percent from 7.8 percent, as expected, as fewer Canadians were actively looking for work.
Some of the details of the report were upbeat, suggesting a better quality of jobs being created as economic growth picks up speed. Employers added some 90,600 full-time workers to their payrolls, offset by a loss of 92,100 part-time jobs. Private-sector employment also grew while government jobs were on the decline.
"The headline unemployment result is a bit of a shocker but you don't have to dig too far beneath the headline to realize there's quite a bit more strength here than the overall number would suggest," said Doug Porter, deputy chief economist at BMO Capital Markets.
"I think the Bank (of Canada) will look through that pretty quickly and it probably won't have a big impact on the bank," he said.
The Canadian dollar weakened immediately after the data to as low as C$0.9584 to the U.S. dollar, or $1.043, in what analysts called a knee-jerk reaction. The currency then strengthened to C$0.9532 after digesting the details of the report.
"It's (the report) showing that some of the slack is disappearing in the economy with the move from part-time positions to full-time positions. That shows that people are working more hours. That's probably a good thing," said Jacqui Douglas, strategist at TD Securities.
The employment report comes as bad news for Prime Minister Stephen Harper, who is campaigning for the May 2 federal election on his economic track record. A big theme in the election has been jobs, especially in vote-rich Ontario where manufacturers are still struggling from the recession.
It is the final piece of data before the Bank of Canada's interest rate announcement on Tuesday when the bank is widely expected to hold its key rate unchanged at 1.0 percent. A Reuters poll released on Thursday showed analysts see zero chance of a rate hike by the central bank next week and most are betting on a move in July.
Overnight index swaps, which trade based on expectations for the key central bank rate, showed investors have fully priced in a quarter-point rate hike by September, largely unchanged from before the report. They see a slightly higher chance of rate hikes in July than prior to the report. BOCWATCH
The biggest job creators were the accommodation and food services sector and construction while the manufacturing, health care, social assistance and public administration sectors laid people off, Statscan said.
The average hourly wage of permanent employees -- which is closely watched by the Bank of Canada for inflation pressures -- rose 2.6 percent from March 2010, compared with a 2.5 percent year-on-year rate in February. (Additional reporting by Chandra Ramarathnam, John McCrank, Claire Sibonney and S. John Tilak; Editing by Kenneth Barry)
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