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A woman walks past the Bank of Canada office in Ottawa on July 16, 2015.Chris Wattie/Reuters

September inflation, August retail sales miss estimatesYields on Canada's short-term sovereign debt slid to a six-week low after underwhelming economic data pared expectations for another interest rate hike this year.

Both September inflation and August retail sales came in below analysts' expectations on Friday, suggesting the Bank of Canada will remain on hold at its announcement on Oct. 25 after raising rates twice in a row. Governor Stephen Poloz said Oct. 14 that this year's tightening has offset 2015 easing and the bank was now in "intense data-dependent mode."

"While the retail dip doesn't destroy the bigger picture of consumer strength, it reinforces the theme that overall growth is now set to cool after a strong run," Doug Porter, chief economist at the Bank of Montreal, said in a note.

The likelihood of a hike next week dwindled to 18 per cent from 53 per cent from over a month ago and fell to 41 per cent from 75 per cent by the end of the year, according to overnight index swaps data compiled by Bloomberg. The yield on Canada's two-year note dropped two basis points to 1.47 per cent at 10 a.m. in Toronto, the lowest since Sept. 7.

"We're seeing rate expectations becoming a little bit more realistic," Mark Frey, chief operating officer at Cambridge Global Payments, said in an interview in Toronto. The market had previously anticipated the Bank of Canada would move more aggressively than the U.S. Federal Reserve after a slower start. "What's becoming increasingly clear is that the bank is nearly done removing monetary accommodation, at least for the near term."

Inflation accelerated to 1.6 per cent in September but that was driven mostly by gasoline and missed expectations for a 1.7-per-cent increase. Retail sales unexpectedly declined by 0.3 pe rcent in August versus forecasts for a 0.5-per-cent rise.

Economy Slowing

The data support the contention the economy is slowing to more sustainable levels, with economists forecasting annualized growth will halve in the second half of this year from the 4.1-per-cent pace recorded in the first half. Recent economic data were mixed with July economic growth and September jobs below expectations and September housing starts and August manufacturing sales overshooting.

Further undermining confidence is the growing uncertainty over the future of the North American Free Trade Agreement. The U.S. this week presented proposals that could make the deal unfeasible for Canada and Mexico and talks were extended through March.

Cambridge Global Payments's Frey, whose company provides cross-border payment and currency-risk management services, sees one to two more hikes in 2018, "and if there's one towards the close of this year, that comes out of the 2018 forecast." He also expects the Canadian dollar to weaken towards $1.27 to $1.28 per greenback this year from $1.2590.

"Poloz should feel quite vindicated with his decision to raise interest rates when he did," said Ben Homsy, a fixed-income portfolio manager at Leith Wheeler Investment Counsel Ltd. in Vancouver. "The bank can probably be a little bit more patient than it was in the last couple of meetings."