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OTTAWA (Reuters) - More than a third of Canadian companies expect inflation to push beyond the central bank's comfort zone in the next two years, according to a poll released on Monday, as many businesses plan to pass along higher commodity costs to their customers.
The results of the Bank of Canada survey of business managers supported market expectations that the bank would keep interest rates on hold next week, after a surprise decision to forego a rate cut last month because of a worsening outlook on inflation.
At the same time, businesses surveyed by the Bank of Canada in the second quarter were relatively upbeat on their sales outlook and investment plans compared with the first quarter, even though the economy remained sluggish.
Rising prices of oil and other commodities have driven up costs for Canadian businesses, and some plan to pass on those costs to consumers, the survey showed.
As a result, 36 percent expect inflation of above 3 percent over the next two years, up from 17 percent of the respondents in the previous quarterly poll. A majority of 63 percent expect inflation to stay within the target range of 1-3 percent.
Soaring prices for oil, food and other commodities caused the balance of opinion on both input and output price growth to rise to its highest ever for the survey, which goes back to 1998. The balance of opinion is the percentage of companies expecting greater price increases minus the percentage expecting smaller price increases.
"Many firms plan to at least partially pass their higher costs through to their output prices, and they expect their competitors to do the same," the bank said in its release.
Still, other companies said they would absorb the higher prices due to competitive pressures.
The Bank of Canada unexpectedly kept its overnight lending rate steady on June 10 while markets had almost unanimously expected a quarter-point cut. Rising inflation worries were the reason for the last-minute change of heart, the bank said, and it signaled it would likely stand pat in July as well.
The bank's survey showed the private sector held a fairly sanguine outlook on its own activities even after the economy unexpectedly contracted
The portion of companies planning to boost their investment in machinery and equipment jumped to 40 percent from 28 percent in the previous poll.
The outlook for sales growth was relatively unchanged, nearly half of the companies reported capacity pressures and 40 percent reported labor shortages. The bank said capacity pressures were much greater in Canada's resource-rich west than in the manufacturing-heavy central region.
The number of poll respondents that said credit conditions had tightened in the past three months fell to 29 percent, its lowest since the credit crunch began in the third quarter of last year.
Reporting by Louise Egan; Editing by Frank McGurty