(Adds details, analyst comment, market reaction, byline)
By Leah Schnurr
OTTAWA Oct 6 (Reuters) - Canadian wage growth accelerated at its fastest pace in over a year in September, keeping alive the possibility that the Bank of Canada could hike interest rates for a third time by the end of the year.
Average hourly wages for permanent employees rose 2.2 percent last month from a year ago, Statistics Canada said in its jobs report on Friday.
The acceleration, which was the fastest annual pace since June 2016, suggested there may be a recovery in wage growth, which has been weak despite strong labor market gains over the past year and is being closely watched by the Bank of Canada.
Analysts said the growth in wages was more encouraging than September's increase of 10,000 jobs, which was below forecasts and pointed to a cooling economy over the second half of the year.
The Bank of Canada has raised interest rates twice this year, spurred by strong economic growth that has put Canada at the top of the Group of Seven nations.
While expectations for a third rate hike later this month have dwindled following cautious comments from policymakers, markets placed the odds of an increase at 18 percent after the jobs report, compared to 12.2 percent before.
"I think this is going to reinforce the Bank of Canada's expectations that we're spiraling upward on wage and price pressures in the Canadian economy," said Derek Holt, vice president of economics at Scotiabank.
Although Holt continues to expect a hike at the central bank's meeting in December, he said the possibility of an October increase was still in play.
Markets put the odds of a December hike at 64.3 percent.
The Canadian dollar touched a five-week low against its U.S. counterpart immediately after the Canadian jobs report before recovering some losses to trade little changed.
Jimmy Jean, senior economist at Desjardins Capital Markets, said the wage growth was "a pretty rapid improvement," though he did not expect it to move the needle on the October rate decision.
"It is a sign that the job market is tightening," Jean said.
September's job gains were driven by the public sector, which added 26,200 positions, while the private sector shed 15,500 jobs. The unemployment rate held steady at 6.2 percent as the number of people looking for work edged down.
The education sector led the way up, adding 20,000 positions, while the public administration field added 4,500 jobs. Elsewhere, the wholesale and retail trade sector added 16,600 jobs.
(Additional reporting by Fergal Smith and Solarina Ho in Toronto; Editing by Paul Simao)