Canada retail sales, inflation miss keeps talk of rate cut alive

By Leah Schnurr

OTTAWA (Reuters) - A drop in Canadian retail sales in August and cooler-than-anticipated annual inflation in September reinforced speculation the Bank of Canada may lower interest rates again, after the bank acknowledged this week it had considered cutting.

Statistics Canada said on Friday retail sales fell 0.1 percent, missing expectations for a 0.3 percent gain. Volumes fell 0.3 percent.

The weak retail performance in the first two months of the third quarter could mean there is somewhat less buoyancy to the expected economic rebound. Analysts expect growth picked up in the third quarter after wildfires in Alberta caused a contraction in the second quarter.

Economists had anticipated retail sales would be supported by the new child benefit checks that families began receiving in July, but the figures suggested consumers may be choosing to save or pay off debt for now.

"This is exactly when the much-ballyhooed child benefit effect should be kicking in in a big way," said Doug Porter, chief economist at BMO Capital Markets. "If it is not showing up here, it's not going show up anywhere."

The annual inflation rate rose to 1.3 percent in September, shy of forecasts for an increase to 1.5 percent, as food prices saw their smallest gain since 2000.

Economists said the disappointing figures were likely to keep talk of a rate cut alive. The central bank left interest rates at 0.5 percent earlier this week, but downgraded its economic outlook and said it had considered cutting for the second time in three years.

Avery Shenfeld, chief economist at CIBC Capital Markets, said the door for a rate cut that the central bank had opened got a tad wider with the day's data, though he noted it would take more data for the bank to move off the sidelines.

The Canadian dollar weakened to a one-week low against the greenback following the data. [CAD/]

Retail sales declined in seven of 11 sectors in August, accounting for 57 percent of retail trade, led by lower sales of new and used cars and a decline in purchases at general merchandise stores.

Annual core inflation, which strips out volatile items and is watched by the central bank, held at 1.8 percent in September, as expected.

Food prices rose 0.1 percent from a year ago, marking the smallest annual gain since February 2000. The cost of fresh vegetables fell for the first time since January 2013.

(Additional reporting by Andrea Hopkins; Editing by Meredith Mazzilli)