By Promit Mukherjee

OTTAWA (Reuters) -Canada’s retail sales fell in May by more than expected, data showed on Friday, further boosting calls for an interest rate cut next when markets see an almost certainty of another 25 basis point rate reduction.

Retail sales, which comprise motor vehicles, clothing, furniture, food and beverages among others, dropped by 0.8% in May on a monthly basis, reversing a 0.6% rise in April, Statistics Canada said.

The fall was primarily led by a sharp drop in sales at supermarkets and grocery retailers as consumers spent less amid persistent food inflation and high interest rates.

Analysts had forecast that sales would likely drop by 0.6% in May, and had estimated sales excluding automotive and parts would drop by 0.5%.

“All told, today’s retail sales data likely seals the deal for another 25bp rate cut next week, with households clearly struggling under the weight of high borrowing costs,” Royce Mendes, head of macro strategy at Desjardins Group, wrote in a note.

Sales at food and beverage retailers, which contribute almost a fifth of total sales, were down 1.9% led by a slump of 2.1% in purchases at supermarket and grocery retailers, Statscan said.

Food prices purchased from stores rose 1.5% on a year-over-year basis in May following a 1.4% increase in April. This was the first acceleration since June 2023, the statistics agency had said last month.

June’s retail numbers, which survey only half of the respondents for a preliminary estimate, showed that sales likely dropped by 0.3%, a flash estimate by Statistics Canada said.

The Bank of Canada had cut its key overnight rate by 25 basis points to 4.75% last month after inflation continued to stay below 3%, close to the upper limit of its 1-3% target range. It aims to keep inflation at the mid-point of this range.

Financial markets are expecting over 90% chance that there will be a rate cut at the BoC’s July 24 monetary policy decision announcement.

The Canadian dollar extended losses after the retail sales data with the loonie trading down 0.26% to 1.3740 against the U.S. dollar, or 72.78 U.S. cents.

Retail sales excluding those at motor vehicle and parts dealers, which accounts for over a quarter of total sales, slumped by 1.3%, Statscan said.

May retail sales totaled C$66.13 billion ($48.20 billion) and saw a drop across eight out of nine sub sectors and in volume terms sales decreased 0.7% in May.

($1 = 1.3720 Canadian dollars)

(Reporting by Promit Mukherjee and Dale Smith in OttawaEditing by Nick Zieminski)

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