July 31, 2018 / 2:31 PM / 20 days ago

Canada economy rebounds, but imminent rate hike seen unlikely

OTTAWA (Reuters) - Canada’s economy rebounded in May after a series of challenges in April but analysts played down the chances of an imminent rate hike, saying the Bank of Canada had already predicted strong second quarter growth.

FILE PHOTO: A construction worker works on a new house being built in a suburb located north of Toronto in Vaughan, Ontario, Canada, June 29, 2015. REUTERS/Mark Blinch/File Photo

Statistics Canada said on Tuesday that GDP grew by 0.5 percent in May, the biggest increase in a year, as industries recovered from bad weather and maintenance shutdowns.

The central bank, which says it will reduce stimulus as the economy strengthens, raised interest rates for the fourth time in a year on July 11 and signalled more hikes to come. Its next fixed date for a rate announcement is on Sept 5. [nL1N1U70MS]

Economists said second quarter growth was likely to come in at 3.0 percent on an annualised basis, just above the Bank of Canada’s 2.8 percent forecast.

“We doubt that May’s solid gain will cause the Bank to

seriously contemplate another interest rate rise as soon as September,” Stephen Brown, a senior Canadian economist at Capital Economics, said in a note to clients.

The retail sector expanded by 2.0 percent while construction posted a 0.7-percent gain. The oil and gas extraction sub-sector rose 2.5 percent on increased crude bitumen exploitation.

The only one of the 20 major industries to sink was the utilities sector, which shrank by 2.4 percent on lower demand for electric power generation, transmission and distribution as the weather improved.

“It is unlikely that today’s data alters (the bank’s) narrative ... while it may not be right around the corner, so long as the Canadian economy continues to evolve in line with their expectations, more monetary tightening will be forthcoming,” said economist Brian DePratto of TD Economics.

Market expectations of an interest rate hike in September, as reflected in the overnight index swaps market, rose to 21.91 percent from 19.65 percent before the release. [BOCWATCH]

The Canadian dollar barely moved and by 10 a.m. (1400 GMT) was trading at C$1.3043 to the U.S. dollar, or 74.46 U.S. cents.

Eric Theoret, a currency strategist at Scotiabank, said market concerns over trade were limiting the Canadian dollar’s scope for strengthening.

Talks to renew the trilateral NAFTA trade pact have dragged on for a year and U.S. President Donald Trump is mulling tariffs on Canadian autos.

Separately, Statscan said Canadian producer prices rose 0.5 percent in June from May, the sixth consecutive increase, on higher prices for non-ferrous metal products and motorized and recreational vehicles.

Additional reporting by Fergal Smith in Toronto; Editing by Frances Kerry

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