UPDATE 2-Canada's Dec retail sales herald more rate hikes


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By Gilbert Le Gras

OTTAWA, Feb 21 (Reuters) - Higher than expected retail sales in December herald stronger sales in January due to the popularity of Christmas gift cards, and that points to two more interest rate hikes by the Bank of Canada, analysts said on Tuesday.

Statistics Canada said December retail sales rose 0.3 percent from November. Analysts had expected an increase of 0.2 percent.

"This recent shift towards gift cards that retailers don't count until they're redeemed in January...and the (formerly governing) Liberals' tax cuts should support first-quarter consumer spending," J.P. Morgan economist Ted Carmichael said.

The Canadian dollar rose to C$1.1453 to the U.S. dollar, or 87.31 U.S. cents, from C$1.1470 to the U.S. dollar, or 87.18 U.S. cents, after the release of both the December data and overall retail sales figures for 2005. Sales for the year were up 6.3 percent from 2004, Statscan said.

"We think there's going to be two more rate hikes. One in March and then another in April," Carmichael said.

"We think the Fed's going to pause, opening the door for the Bank of Canada to do the same, and then we'll get a third hike in September," he added.

The Bank of Canada has raised interest rates at each of its last four announcement dates to 3.50 percent now. Comparable rates in the United States stand at 4.50 percent. The next Bank of Canada rate announcement is due in two weeks.

The retail sales rise in December was broad-based and came in at 0.4 percent if the dominant auto sector is excluded. Leading the gains was the furniture and home-electronics sector, with a 1 percent rise on the month.

The Canadian economy has been growing almost at capacity -- the point at which inflationary pressures begin to build -- for the past several months, and economists said Tuesday's figures showed an expansion over that threshold.

The Bank of Canada's explicit inflation target is at the midpoint of its 1-3 percent range. January's inflation data are due on Wednesday. The last report put overall consumer prices at 2.6 percent and core inflation at 1.7 percent.

"Canadian consumers continue to spend at a very respectable rate supported by still low interest rates and solid employment gains," said BMO Nesbitt Burns economist David Watt.

"And, just like in the U.S., warm weather and gift card redemption will boost January sales. The Bank of Canada will take this information as a sign that modest rate hikes are still appropriate."

($1=$1.15 Canadian)



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