Canada's economy slowed in February, backing up pause on rates

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) -The Canadian economy grew less than expected in February from the previous month and is seen shrinking in March, data showed on Friday, figures that back up the central bank's plans to keep interest rates on pause.

February gross domestic product gained 0.1%, less than the 0.2% increase forecast by analysts, after an upwardly revised 0.6% expansion in January, Statistics Canada said. March GDP was most likely down 0.1%, Statscan said in a preliminary estimate.

The flash estimate for March, which may change when a final tally is released next month, means the economy likely grew 2.5% on an annualized basis in the first quarter. The Bank of Canada (BoC) has forecast a 2.3% rise in real GDP in the first quarter.

"The Canadian economy looks to have stumbled in the early spring after a sprinting start to the year," said Doug Porter, chief economist at BMO Capital Markets.

The largest strike in Canadian history, now in its 10th day, will affect this month's growth, analysts said, with the overall impact being a weaker start to the second quarter than had been previously expected. The strike by federal government workers represented by the Public Service Alliance of Canada is affecting services ranging from tax returns to passport renewals.

"Against this backdrop, the Bank of Canada is expected to remain on hold, assuming inflation continues to recede and notwithstanding their tough talk on the possibility of further rate hikes," Porter said.

The central bank, which had raised interest rates at a record pace over the past year to cool the economy and bring prices down, was the first major central bank to pause its tightening campaign and say it would not raise rates if inflation continued to ease as expected.

The bank earlier this month left its key policy rate at a 15-year high of 4.50% for a second time in a row, but struck a hawkish tone, playing down market expectations for a cut this year as the risk of a recession diminished.

The BoC expects positive but weak growth during the remaining three quarters of this year. At its meeting earlier this month, the BoC even discussed raising rates because of stronger-than-expected growth, a tight labor market and concerns about inflation in the services sector.

"While a weakening economy should prevent policymakers pulling the trigger on another interest rate hike, we don’t see cuts forthcoming until early next year," said Andrew Grantham, senior economist at CIBC Economics

Canada's goods-producing sector expanded 0.1% in February, while the service-producing sector also posted a 0.1% rise.

February's gains were helped by growth in the public, construction, finance and insurance sectors, while wholesale and retail trade sectors were drags.

In March, GDP was likely impacted by decreases in retail and wholesale trade sectors, Statscan said.

The Canadian dollar was trading 0.3% lower at 1.3630 to the greenback, or 73.37 U.S. cents, after touching its weakest level in one month at 1.3667.

(Reporting by Ismail Shakil in Ottawa; Additional reporting by Dale Smith in Ottawa and Fergal Smith in Toronto; Editing by Mark Porter and Jonathan Oatis)