Data puts consecutive Canada rate hikes in limbo

TORONTO, June 26 Tue Jun 26, 2007 1:37pm EDT

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TORONTO, June 26 (Reuters) - The Bank of Canada is largely expected to raise interest rates next month, for the first time in over a year, but a sudden downturn in economic data has cast doubt on the likelihood of more tightening in September.

Economic data released last week showed an unexpected drop in April wholesale trade, which wiped out strong gains in the prior two months, while March retail sales missed estimates.

The soft data followed a string of upbeat economic indicators that topped estimates and convinced most primary dealers that 25 basis point rate hikes by the Bank of Canada in July and September were a lock.

"We still think the bank is on track to move a couple times this summer but we certainly have less confidence than we did a few weeks ago," said Sal Guatieri, senior economist at BMO Capital Markets. "The softer data makes the prospect of a Bank of Canada rate increase (in September) a little dicier."

Canada's key overnight rate has been steady at 4.25 percent since May 2006, but last month the slew of upbeat domestic data convinced the central bank to signal upcoming rate hikes to cool a red-hot economy.

Since then, the Canadian dollar, which hit a 30-year high against the U.S. currency earlier this month, has given back a chunk of its gains due to the softer economic numbers.

At 1:30 p.m. (1730 GMT), the Canadian unit was at C$1.0695 to the U.S. dollar, or 93.50 U.S. cents, off the multi-decade high of about C$1.0550, or 94.78 U.S. cents, reached June 4.

Key numbers still due before the Bank of Canada delivers its next rate decision on July 10 are the April gross domestic product figures on Friday and June employment data on July 6.

Both reports are expected to point to further cooling in the economy and could possibly convince the market to rethink what has, until recently, been widely considered as a near-certain 25 basis point rate hike in September.

"The upcoming indicators ... are not exactly going to be barn burners, so that will set up an economic backdrop whereby another rate hike in September is not in my view necessarily needed," said Carlos Leitao, chief economist at Laurentian Bank of Canada in Montreal.

"So I think the stars are lining up for a Bank of Canada statement on July 10 that will force the market to revise its anticipation of another rate hike in September."

But even if the data does disappoint, core inflation will likely remain above the Bank of Canada's estimate, which could be enough to convince Bank of Canada Governor David Dodge to move on rates in both July and September.

"The softer data means that Dodge can wipe the sweat from his brow, but he is still perspiring," said Guatieri. "And there is still enough inflation pressure in the system that he will likely need to address by raising rates."

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