Retail sales rose 1.8% in June to $25.6 billion, Statistics Canada reported this morning. The solid monthly gain has economists pondering whether the Bank of Canada will increase interest rates at it next meeting.

May’s 1.1% drop in sales was more than erased by June gains that were more than double expectations. RBC Financial Group economists say, “Backed by a job creation machine showing no signs of faltering, Canadian consumers are throwing caution to the wind, opening their wallets and spending like there’s no tomorrow. Great financing opportunities were already drawing consumers into the housing and autos markets. The broad based advance of retail sales in June confirms that there was plenty of purchasing power left over following large purchases for other types of spending.”

“Despite the banner headlines on June sales, a quick look at the faces of Hudson’s Bay shareholders tells you that not all has been glory for Canadian retailers of late,” notes CIBC World Markets. “In fact, after stripping out inflation, real retail sales were down 1% annualized in the second quarter, measured on a quarter-over-quarter average basis. That’s not good news for the consumption figure in Q2 GDP. The optimists will, however, take comfort in the upward momentum as the spring quarter came to a close.”

BMO Nesbitt Burns says, “This is a strong report through and through. Despite weak equity markets, Canadian consumer spending is being lifted by robust job growth and still-low borrowing costs. Even if the Bank of Canada chooses to stand aside in early September, the stage is set for further rate hikes later this year in the face of this underlying strength of consumer spending.”

CIBC says that markets have now voted decisively for a Bank of Canada rate hike in early September in pushing up short rates, and the Canadian dollar also benefited from the stronger-than-expected data today. RBC concurs with this view, noting, “The Canadian economy is now operating very close to full capacity with core inflation sitting slightly above the 2% mark increasing the odds of a 25 basis point rate hike by the Bank of Canada on September 4.”

But CIBC says, “We still see the Bank’s decision coming down to the weight that the central bankers will give to risks of weakness in the U.S. outlook and its implications for Canada, against healthy performance on this side of the border in the year to date. While we had expected the Bank to take the opportunity to wait for greater clarity on the U.S. and financial market stability before acting again, this report clearly adds weight in the other direction.”