Canada's economy geared down at the end of the first quarter, reinforcing the central bank's decision to stop raising interest rates.

Preliminary data suggest gross domestic product contracted 0.1% in March, led by decreases in retail, wholesale and mining sectors, Statistics Canada reported Friday in Ottawa. That followed a 0.1% expansion in the previous month, slightly weaker than expectations for 0.2% growth in a Bloomberg survey.

Overall, the monthly gains point to annualized growth of 2.5% in the first quarter, according to an initial estimate from the statistics agency. Though it will likely be revised, that's roughly in line with the 2.3% pace projected by the Bank of Canada earlier this month.

The numbers will give Governor Tiff Macklem and his officials some confidence that their monetary policy stance is sufficiently restrictive to bring inflation back to the 2% target by the end of 2024. Still, with Canada's economy continuing to add jobs and underlying measures of price pressures proving sticky, the central bank is likely to keep the door open to further tightening.

"Until there are clearer signs that slowing growth is also helping to ease core inflation, the Bank of Canada will continue to lean towards raising interest rates, even if a hike is not ultimately needed," Andrew Grantham, an economist with Canadian Imperial Bank of Commerce, said in a report to investors.

Canada's economy stalled at the end of last year, but surprisingly strong January data prompted many economists and the central bank to boost estimates for growth at the beginning of 2023. Most economists expect the country will now achieve a so-called "soft landing," and a monthly survey by Bloomberg shows analysts no longer expect a technical recession in the middle of this year.

Still, the GDP data provide evidence that higher interest rates are starting to weigh on growth as Canada's heavily indebted households reduce purchases.

Bonds initially rallied on the weak data before giving back some of those gains. The two-year benchmark bond was yielding 3.691% at 10:07 a.m. in Ottawa, down about 4.5 basis points on the day. Swaps traders are betting the Bank of Canada will start cutting rates as early as December, little changed from before the release.

During deliberations ahead of the April 12 decision to hold the benchmark overnight rate at 4.5%, policymakers considered raising borrowing costs higher, citing stronger-than-expected growth and still-elevated core inflation. But they opted to stand pat, expecting that pressures on the labor market and consumer prices will ease in the months ahead.

"The shaky March data will reinforce the Bank of Canada's decision to hold rates steady at its last policy announcement," Royce Mendes, head of macro strategy at Desjardins Securities, said in a report to investors. "That said, it's not yet enough to move central bankers to completely close the door to future rate increases."

In February, the public sector expanded 0.2%, up for the thirteenth straight month. The construction industry grew 0.3%, while wholesale, retail, and manufacturing declined by 1.3%, 0.5% and 0.1%, respectively.