Canada's economy produced a full month of better-than-expected economic data, helping to crank up inflationary pressure beyond expectations in February and put the Bank of Canada in the uncomfortable position of possibly breaking its pledge on interest rates.
Following the release of key inflation and retail sales data Friday from Statistics Canada, at least one Bay Street economics team revised upward its growth forecast for the first quarter by a full percentage point, and indicated more positive revisions could be in the offing.
The data, however, failed to power the Canadian dollar's march to parity with its U.S. counterpart -- although the loonie nonetheless made big gains Friday against the world's other major currencies, as it set a three-decade high against the British pound and a 28-month high against the euro.
In all, Friday's developments suggest the Canadian economy is roaring back at a pace that might be setting off warning bells at the Bank of Canada, which had conditionally pledged to keep its benchmark rate at 0.25% until July to get the economy back on track.
"There is simply no mistaking that growth and inflation have more underlying power than even the most strident optimist would have believed just a few short months ago," said Douglas Porter, deputy chief economist at BMO Capital Markets, which accordingly upgraded its first-quarter GDP forecast for Canada Friday to 4.7% expansion, from its previous 3.7% expectation.
Retail sales was the last piece of data to emerge from January, and with that Porter said Canada produced an "unbelievable" full month of better-than-anticipated economic data. For the record, retail sales jumped 0.7% in January, above the 0.6% consensus.
However, when autos are excluded, sales surged 1.8%, or the biggest one-month gains since late 2007. This was due, in part, to a 7.4% increase in sales at outdoor supply stores, as households rushed to buy building supplies before the one-time federal home renovation tax expired on Feb. 1.
Meanwhile, all eyes were on February inflation data, which proved to be equally robust, with the core rate -- watched closely by the Bank of Canada -- posting a surge beyond the key 2% threshold.
Statistics Canada core inflation, which strips out volatile-priced items such as food and energy, advanced 2.1% year-over-year in February, whereas analysts anticipated a 1.7% year-over-year increase.
The Bank of Canada's last economic outlook, tabled in January, envisaged core inflation to average 1.6% in the first quarter and 1.7% in the second quarter. The central bank's pledge on rates was conditional on its inflation outlook unfolding as anticipated.
The inflation data come with a caveat, as the Vancouver Olympics drove up prices in some key areas, notably travel and lodging.
"I continue to believe the bank will wait until July, but they must be getting incredibly uncomfortable with that long of a wait," Porter said.
Mark Carney, the Bank of Canada governor, might shed further light on the central bank's outlook in a speech in Ottawa this coming Wednesday.
