OTTAWA - Fewer Canadians returned to work in March than expected, but the three-month hiring trend was the strongest since the financial crisis intensified in the autumn of 2008, suggesting the recovery is entrenched.

In the first disappointing employment report since December, the economy added 17,900 net jobs in March following gains of 20,900 in February and 43,000 in January, according to Statistics Canada on Friday.

Analysts surveyed by Reuters had forecast a gain of 25,000 positions.

The modest employment gains take some pressure off the Bank of Canada to raise interest rates and brought markets back to earth after speculation the employment report would be stronger than expected.

The Canadian dollar hit a session low of C$1.0061, or 99.39 U.S. cents after the report. It was trading near parity with the U.S. dollar just before the data.

But economists said that while the gains were below estimates, the three-month average employment growth was the best in two years and reflects a steady economic recovery.

It wasn't a barn-burner report. There were certainly some who were looking for a stronger number based on the absence of stormy weather in Canada in March, but it doesn't dramatically alter the fundamentals for the currency, said Avery Shenfeld, chief economist at CIBC World Markets.

Since the labor market's recovery began in July, 176,000 people have found work, but that is less than half the number who lost their jobs in the nine months prior to July.

RATE HIKE SEEN IN JULY

The employment data may give the Bank of Canada more flexibility as it ponders when to withdraw extraordinary stimulus measures from the economy. The bank has signaled it won't raise its benchmark interest rate from a record low of 0.25 percent before July, unless inflation becomes a threat.

With inflation already hovering near the bank's 2 percent target and stronger-than-expected data pointing to a second straight quarter of 5 percent annualized growth, markets had begun to price in a chance of monetary tightening in June.

But most analysts say the bank will keep its pledge to hold rates at least until the end of the second quarter.

For the Bank of Canada the view is still that the economy is growing a little faster than expected. Core inflation is coming in a little higher than anticipated which raises the risk of the bank moving a little sooner rather than later on interest rates but we still think they're on track to begin tightening in July.

Yields on overnight index swaps, which trade based on expectations for the central bank's key policy rate, edged lower after the jobs data, suggesting the market sees rate hikes as slightly less likely. BOCWATCH

Markets see rates rising in July and reaching 1.25 percent by December.

Wage inflation, based on the average wage of permanent employees, was 2.5 percent in March year-on-year, unchanged from February.

The employment gains in March were credited to the creation of part-time employment, which offset a decline in full-time positions. However, in a positive sign of economic recovery, the private sector did most of the hiring as public sector hiring waned.

The goods-producing industries overall added 39,800 jobs, and the services sector shed 21,900 jobs.

Employment grew most in professional, scientific and technical services. Construction, likely as a result of government stimulus money for infrastructure projects, and natural resources were the other biggest contributors. (Additional reporting by Scott Anderson and Claire Sibonney; Editing by Padraic Cassidy)

Canada Inflation Unemployment