Whether the Bank of Canada raises its key interest rate in June is dependent on the economic situation in Europe, analysts say.
Bank of Canada governor Mark Carney had been long expected to raise interest rates on June 1, based on domestic economic indicators, but the volatile situation in Europe is putting that in flux.
"Every indicator in Canada is pointing to a rate hike, but it's not all about domestic fundamentals," CIBC economist Krishen Rangasamy told The Canadian Press.
If the European situation continues to impact global financial growth in the near or long term, raising Canadian interest rates will only slow economic activity, when the opposite is needed.
"The domestic data are screaming for tighter policy, but Canada doesn't exist in a vacuum and global market conditions, plunging stock markets and commodity prices, widening risk spreads, simply cannot be ignored," Benjamin Reitzes of BMO Capital Markets said.
A number of domestic signs point to a strengthening economy, including core inflation rising to 1.9 per cent on annual basis and higher retail sales.
Still, the economy is still under capacity and employment remains below mid-2008 levels.
The dollar, which dropped this week, based on European debt fears, rose slightly on the inflation news Friday.
Thomas Caldwell, CEO of Caldwell Securities, says despite the Canadian dollar's slight fall from its recent parity status with the U.S. dollar, it is doing quite well compared to other currencies.
"What is happening is money is flowing into the U.S, even though it has a big deficit and tremendous spending. It's like a reverse beauty contest, who's the least bad?" he said on Â鶹´«Ã½ Channel. "Money is going into the United States because they have taxing power."
He said the U.S could raise taxes to cover budget shortfalls, something a lot of European countries, Greece in particular, could not do.
Caldwell said the market should continue to improve this year, but perhaps not as rapidly as in 2009.
"We have low interest rates, relatively low inflation and the economies in Canada and the U.S. are slowly growing," he said.
Prime Minister Stephen Harper reiterated his government's long held position Friday, saying the fundamentals of the Canadian economy remain strong.
"We're seeing the economy beginning top grow and it's certainly leading all developed nations," Harper told reporters in Niagara Falls, Ont.
Still, he did cast an eye towards the economic situation in Europe.
"We are aware of the uncertainty it other markets and the potential of that uncertainty to affect us."
