Interest Rate Increases may come before July

Higher inflation and strong retail sales have economists wondering whether we will see the Bank of Canada raising interest rates sooner than expected.

The economic data released on Friday came as the Canadian dollar sitting close to parity with the U.S. greenback.

The loonie went past the 99 cent (U.S.) mark in morning trading, however it fell down as the U.S. dollar strengthened.

The Canadian dollar settled at 98.39 cents (U.S.) after a fall of 0.26 of a cent.

Camilla Sutton, currency strategist at Scotia Capital noted that with firmer employment, firmer inflation and stronger than expected retail sales have pointed to an economic landscape which is fairly strong. Sutton believes that there is an increasing expectation that rates might be raised before July.

Canada’s core inflation rate has risen beyond the Bank of Canada’s expectations to 2.1% from 2% according to data released by Statistics Canada.

Earlier in the month we saw the Bank of Canada say conditional on the current rate of inflation, overnight rates are expected to hold until the end of the second quarter of 2010.

We will know more detail on this in the next month when new data comes in, however if an increase is seen similar to February’s then the possibility of rates increasing earlier than expected are more than likely to happen.