Canada's economy created far more jobs than expected in June in a surprising sign of strength after a raft of discouraging data, fueling expectations the central bank will hike interest rates again this month.

Statistics Canada said on Friday employment surged by 93,200 in June, adding to gains to nearly make up for the 417,000 jobs lost during the country's recession.

Analysts in a Reuters poll had predicted an increase of 15,000 jobs after a moderate gain in May of 24,700 positions.

The unemployment rate in June fell unexpectedly to 7.9 percent from 8.1 percent, the lowest since January 2009 but still well above the pre-recession level of 6.2 percent.

Rising employment increases the chance the Bank of Canada will raise its key interest rate on July 20 for a second time in a row, analysts said.

I think it just reinforces our call that they are going to go 25 basis points, said Benjamin Reitzes, economist at BMO Capital Markets.

While the GDP numbers for April weren't that great, the ongoing strong job numbers just give you more encouragement that the ongoing Canadian growth remains solid, and I guess that means that extremely low rates aren't necessary as maybe they were a year ago, he said.

The bank raised rates on June 1 to 0.5 percent from an emergency low of 0.25 percent, becoming the first among the Group of Seven industrialized nations to start tightening monetary policy after the financial crisis.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, jumped after the report. The market is pricing in an 86 percent likelihood of a July 20 rate hike, compared with about 68 percent just before the jobs data. BOCWATCH

The Canadian dollar CAD=D4 surged about 1 percent to its strongest value since late June after the data, reaching C$1.0340, or 96.71 U.S. cents.


The jobs report also showed wage pressures were easing, which could give the Bank of Canada more leeway to gradually raise rates. The average hourly wage of permanent employees, watched by the Bank of Canada for inflation pressure, rose 2 percent in June from a year earlier, down from the 2.7 percent year-on-year increase recorded in May.

Tom Nakamura, fixed income portfolio manager at AGF Investments, said the drop in hourly earnings suggests that the Bank has some time, but we know employment data is somewhat lagging in terms of the economy and wages would also lag.

Services industries did all the hiring in June, with retail and wholesale trade leading the way.

Layoffs in manufacturing exerted a drag on the goods-producing sector. Factories shed 14,000 workers in June and employment in that sector remains 11.9 percent below pre-recession levels.

The Organization for Economic Co-operation and Development (OECD) forecast in a report on Wednesday that the Canadian jobless rate will drop to 7 percent by the end of next year.

The Paris-based body said the country's long-term unemployment rate -- a measure of those without work for 12 months or more -- doubled as a percentage of the labor force to 8 percent in 2009. However, that is far lower than the OECD average of nearly one in four. (Additional reporting by Toronto treasury team; Editing by Padraic Cassidy)