By Ismail Shakil

OTTAWA Canadian retail sales underperformed expectations in May and were likely unchanged in June, data showed on Friday, pointing toward a slowdown in economic growth that would allow the Bank of Canada to leave interest rates unchanged.

Sales rose 0.2% in May from April, less than the 0.5% increase forecast by analysts in a Reuters survey. The rise was led by increases at motor vehicle and parts dealers as well as food and beverage retailers, according to Statistics Canada.

Sales were up in five of nine subsectors, representing 94.5% of retail trade. In volume terms, retail sales increased 0.1%.

"This data suggests that the economy is slowing in line with the Bank of Canada's forecasts," Tiago Figueiredo, an economist at Desjardins, said in a note. "As such, Canadian central bankers will view this as part of the process and will likely not see the need to raise rates further this year."

The Bank of Canada this month raised its policy rate to a 22-year high of 5.0%, its tenth rate increase since March of last year, and said it could hike it further if fresh data shows inflation is stalling above its 2% target.

Canada's annual inflation rate dropped more than expected to a 27-month low of 2.8% in June, led by lower energy prices, though increases in food and shelter costs persisted.

"The Canadian consumer looks to be losing some wind beneath its wings in the face of still-elevated inflation," Shelly Kaushik, an economist at BMO Capital Markets, said in a note.

The Bank of Canada, citing excess demand, has projected inflation to remain around 3% over the next year before dropping to the central bank's 2% target by mid-2025.

(Reporting by Ismail Shakil in Ottawa; Editing by Paul Simao)