Canadian business stays upbeat but eyes global troubles

Mon Jul 9, 2012 4:10pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canadian businesses remained surprisingly upbeat in the second quarter despite the deepening euro zone crisis, according to a central bank poll that suggests the Bank of Canada may continue to hint at rate hikes even if it is no rush to act.

The survey of senior managers at about 100 firms, released on Monday, showed Canadian businesses were markedly less confident about the outlook for sales in the second quarter than they were in the first, when sentiment was at a two-year high.

Expectations for inflation shifted lower, but hiring intentions rose to match the record high reached a year earlier. Companies' investment plans remained robust and an increasing number of firms reported capacity pressures.

"Canadian business continues to put a brave face on the outlook," said Doug Porter, deputy chief economist at BMO Capital Markets.

"While this may not translate into action, the latest survey results will make it tough for the Bank of Canada to completely abandon its (mild) tightening bias at next week's interest rate announcement," he said in a note.

The survey is one of the final data points before the central bank's July 17 interest rate decision, which must weigh the domestic economy's relative strength against threats from the European debt crisis and the disappointing performance in the United States, Canada's top trading partner.

Bank of Canada Governor Mark Carney is widely expected to hold the key rate at 1 percent. However, in contrast to most of his Western peers, Carney has been hinting at a rate hike since April and the market expects a move in the first quarter of 2013.

But overnight index swaps, which trade based on expectations for the policy rate, also show traders continue to price in a possible rate cut this year.   Continued...

Joggers run past the Bank of Canada building in Ottawa June 5, 2012. REUTERS/Chris Wattie