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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.
In the biggest sign of anxiety among survey participants, fewer than half of the companies surveyed - 47 percent - said they expect sales to grow at a faster pace in the next year. That was down from 58 percent in the first-quarter.
Thirty-two percent expected sales growth to weaken. That brought the balance of opinion - the difference between those expecting faster and weaker growth - to 15 from 35 in the previous survey.
In part, the change reflects companies' view that sales growth cannot keep up with the strong pace of the past 12 months. But fears about global troubles also played a role.
Hiring intentions rose to the strongest level since the second quarter of 2011, which itself was the most upbeat reading since the Bank of Canada started the survey in 1998.
Companies generally expect inflation to fall over the next year, reinforcing the market view that the Bank of Canada will hold off on rate hikes until next year.
Slightly over half expect inflation to be from 2 to 3 percent, the upper half of the Bank of Canada's target range. But 44 percent now see inflation of 1 to 2 percent, up from 28 percent who predicted that in the first quarter.
The percentage of companies reporting difficulty meeting increased demand rose modestly, a sign that the slack in the economy is being gradually absorbed.
But only a third said labor shortages impeded their ability to expand to meet demand, below the historical average.
The oil industry and other resource sectors in Western Canada reported more capacity and labor constraints than their peers.
Still, the overall picture was more bullish than some had expected, said Avery Shenfeld of CIBC World Markets.
"It casts a brighter light on the Canadian fundamentals as seen by business and lending institutions relative to what one might have expected given the news backdrop of late," he said in a note to clients.
Small and mid-sized companies found it a little harder to get financing in the second quarter, while bigger firms said conditions had eased.
In a separate Bank of Canada survey, senior loan officers said business lending conditions were easier overall in the quarter.
Reporting By Louise Egan; Editing by Peter Galloway and Janet Guttsman