Rate hike more likely as exports surge 18% in past year

Two-way trade between Canada and the rest of the world surged to a record high in May, even as the trade deficit doubled to $1.1 billion.

Imports rose for the sixth month in a row, up 2.4 per centin May to $49.8billion, Statistics Canada said Thursday. The biggest factor in the increase was imports of aircraft and other transportation equipment and parts, which soared by 45.9 per cent.

Aircraft imports rose $527million to $636million in May. The import of five new airliners in May contributed the most to the growth, Statistics Canada said Thursday without elaborating.

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Exports, meanwhile, rose for the third month in a row, up1.3 per centto a record $48.7billion during the month. That'salmost 18 per cent above where Canadian exports were a year ago.

"Export growth was broad based, suggesting healthy external demand," TD Bank economist Dina Ignjatovic said.

All in all, two-way trade between Canada and the U.S. rose to$98.5 billionin May, also a record.

Despite the deficit as Canada imported more than it exported, the strong trade data is another sign likely to be interpreted by the Bank of Canada that the economy is improving enough to raise interest rates, which the bank is expected to do next week.

"With several sectors of the Canadian economy showing strength, the Bank of Canada is likely to move off the sidelines sooner rather than later," Ignjatovic said. "While a hike could come as early as next week, we feel that there is little risk in waiting a bit longer to ensure that inflation is moving in the right direction."

Economist Doug Porter at Bank of Montreal is even more confident that a rate hike is now coming. "Exports hit record highs in both nominal and volume terms in the month," Porter said."While it may not be exactly what the doctor ordered, it's likely enough to keep the bank's expected rate hike on track."