Canada inflation, retail sales suggest central bank on hold

By Leah Schnurr OTTAWA (Reuters) - Canadian retail sales racked up their biggest increase in eight months in February, while inflation unexpectedly rose last month, casting cold water on the likelihood of the central bank cutting interest rates again in the near future. Data from Statistics Canada on Friday showed retail sales rose 1.7 percent, handily topping economists' expectations for an increase of 0.5 percent and ending two consecutive months of declines. Separate data showed Canada's annual inflation rate rose to 1.2 percent in March, stronger than forecasts for it to hold steady at 1 percent. "We got hit with a double-barreled blast of much stronger-than-expected news today, which simply raises further doubt on any possibility of future Bank of Canada rate cuts," said Doug Porter, chief economist at BMO Capital Markets. Core inflation, which strips out volatile items and is closely watched by the central bank, likewise was stronger than expected, rising to an annual 2.4 percent. "There's a little bit more underlying power in prices than the Bank of Canada has appreciated," said Porter. "They've consistently brushed aside the high-side surprises in the CPI, but I think this one has got to make them furrow their brow a little bit." Still, the total annual rate hewed close to the lower end of the Bank of Canada's target range. The bank earlier this week held interest rates steady, refraining from following up on January's shock rate cut as it expects the economy will rebound later this year after likely stalling in the first quarter. "The broad takeaway is I think the Bank of Canada policy risks are on hold until fall at a minimum and that's because we need time to assess the risks to the Bank of Canada's new bullish take on growth prospects," said Derek Holt, vice president of economics at Scotiabank. "And this morning's data lends itself in the direction of the Bank of Canada's fresh optimism." The Canadian dollar strengthened to a session high against the greenback following the reports. [CAD/] Gains in retail sales were widespread, including a 2.2 percent increase in sales at gasoline stations. Consumer prices rose in seven out of eight major components for total annual inflation. Lower gasoline prices continued to be the biggest downward driver, tumbling 19.2 percent, though the drop was not as steep as in February. (Additional reporting by Allison Martell, Susan Taylor and Euan Rocha in Toronto Editing by W Simon)