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OTTAWA (Reuters) - Lending conditions in Canada worsened considerably in the fourth quarter and overall business sentiment is at its lowest level in at least a decade, two Bank of Canada surveys showed on Monday.
The central bank surveyed senior loan officers at 11 major banks and senior management at about 100 businesses during the quarter in two separate studies.
"Business sentiment has deteriorated markedly since the autumn survey, as the effects of the international financial crisis and the weak global economy intensified and spread to domestic demand," the bank said.
The pessimism added weight to the view that the Bank of Canada will opt for a half-point cut in its key lending rate on January 20 rather than a less aggressive move.
"Very weak demand conditions, both domestically and globally are impacting every aspect of business activity," said Charmaine Buskas, senior economics strategist at TD Securities.
"This provides further support to our view that the Bank of Canada will continue to ease and is on track for another 50 bps rate cut next week," she said in a written note.
The bank has already lowered its overnight target rate to a 50-year low of 1.5 percent. Markets are pricing in about a 72 percent probability of a 50 basis point cut next week, based on trading of overnight index swaps.
The loan officers reported a widespread tightening of credit conditions, compared with the third quarter, both in terms of price and in terms and standards.
The lenders attributed the situation largely to the worsening economic outlook.
Economist Derek Holt of Scotia Capital said demand for loans may weaken further as industries retrench in the face of a recession.
"Thus, the need for further demand side stimulus is bolstered by this report," he said.
Tougher credit conditions are a top concern for Finance Minister Jim Flaherty as he crafts an economic recovery plan to be included in the next budget, scheduled for January 27.
About two-thirds of the businesses surveyed also said credit conditions tightened, compared with 44 percent who thought so in the previous survey in the third quarter.
The balance of opinion -- those reporting tighter conditions minus those reporting easier credit -- for both lenders and businesses was at its highest on record.
In the survey on business outlook, businesses were also more pessimistic about their sales outlooks, employment and investment plans.
Nearly three-quarters of those surveyed now see inflation staying below the Bank of Canada's 2 percent target for the next two years.
Reporting by Louise Egan; editing by Peter Galloway