(Updates with details and analyst comments)
By Julie Gordon
OTTAWA, Sept 23 (Reuters) - Canadian retail sales fell more than expected in July, though they likely rebounded slightly in August, Statistics Canada data showed on Friday, indicating interest rate increases by the Bank of Canada are slowing consumer spending.
Retail sales fell 2.5% in July, the first decline in seven months and missing analyst forecasts of a 2.0% slump, Statistics Canada data showed. Lower gasoline prices drove the decrease, but sales volumes were also down 2.0%.
A preliminary estimate showed August retail sales likely edged up 0.4%.
"Canadians may have started to react to higher interest rates," Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said in a note.
The Bank of Canada lifted its policy rate by 75 basis points to 3.25% earlier this month and said it expects more increases will be needed. It has so far hiked by 300 basis points in just six months.
While consumers are clearly pulling back on spending, demand is still outstripping supply in the Canadian economy, said Royce Mendes, head of macro strategy at Desjardins Group.
"The Bank of Canada will have to forge ahead with more rate hikes. But it does leave us with more conviction that a 50bp move in October will be the final increase of this cycle," he said in a note.
Money markets have priced in a 50 basis points increase in October and high odds of one more 25 basis points move to bring the rate to 4.0% by year-end.
The Canadian dollar was trading 0.3% lower at 1.3528 to the greenback, or 73.92 U.S. cents. (Reporting by Julie Gordon; Additional reporting by Dale Smith in Ottawa and Fergal Smith in Toronto; editing by Jonathan Oatis)