UPDATE 2-Bank of Canada poll finds businesses cautiously hopeful

Mon Jan 13, 2014 1:15pm EST

(Adds analysts' comments, market reaction, details))

By Louise Egan

OTTAWA Jan 13 (Reuters) - Canadian businesses were hopeful in the fourth quarter of 2013 that sales would increase over the next year and were more upbeat on investment and hiring than in the previous quarter, according to a Bank of Canada survey released on Monday.

But the positive outlook was not shared evenly among the senior managers participating in the bank's quarterly survey. Details of the responses showed that companies benefiting from an improving global economy appeared more encouraged than those relying solely on the domestic market.

"The winter business outlook survey provides some positive signs for the economic outlook, notably for exports and investment, although responses do not yet appear to suggest a significant strengthening," the central bank said in its report.

The bank cited "weak demand and domestic uncertainty" as weighing on some companies as they looked to the year ahead.

The Business Outlook Survey (BOS) of about 100 managers was taken between Nov 18 and Dec 12. It also showed most companies expect inflation to stay at the bottom end of the Bank of Canada's 1 to 3 percent target range and are experiencing less capacity pressure.

Bank of Canada Governor Stephen Poloz has said he is paying especially close attention to business sentiment and the poll results will feed into the bank's Jan. 22 interest rate decision and monetary policy report. There has been some weak economic data since the survey was done and the Canadian dollar has softened considerably against the U.S. dollar.

The bank has held its key rate steady at 1.0 percent since 2010 and Poloz has described its current policy stance as "neutral". Markets are on the alert for any hint of the bank taking a dovish turn.

"On balance, there is little here to nudge the Bank of Canada one way or the other from its decidedly neutral stance," said Michael Gregory, deputy chief economist at BMO Capital Markets, in a note to clients.

"For a central bank worried about the ability of exporters to ride on the coattails of strengthening U.S. and global economies, the BOS results should be modestly encouraging," he said. "For a central bank worried about inflation's persistent underperform, the results are not as encouraging."

For Mazen Issa, senior Strategist at TD Securities, the bank is likely to focus on the risks of low inflation.

"We cannot rule out an explicit easing bias at next week's meeting, and the bank's dovish rhetoric and concern on inflation will persist," he said.

The Canadian dollar CAD=D4 strengthened slightly after the report and at midday was at C$1.086 to the U.S. dollar, or 92.08 U.S. cents, stronger than Friday's close of C$1.0901, or 91.73 U.S. cents.

INTERNATIONAL ORDERS IMPROVE

The balance of opinion on future sales - the difference between the percentage of companies expecting higher sales and the percentage seeing lower sales - was 29 in the fourth quarter, down slightly from 31 in the third quarter survey but still solidly positive.

Companies benefiting directly or indirectly from increasing global activity were more positive, the bank said, as orders from customers outside Canada have strengthened.

The brighter export picture is likely a welcome sign for the Bank of Canada, which has highlighted the sector's lagging performance as one big reason the economy has not fully recovered from the 2008-09 recession.

The other area of concern is business investment, which also looks set to pick up, according to the poll.

Forty-two percent of businesses said investment would increase, compared with 34 percent in the third quarter. Similarly, 53 percent expect to have more employees over the next year, compared with 43 percent previously.

The optimism on investment and hiring was mostly concentrated in the services sector.

Inflation is the other big headache for the bank as it has remained below its 2 percent target for 19 months, coming in at 0.9 percent in November.

While intense retail competition is one factor keeping prices low, Poloz says policymakers have had trouble explaining why inflation is so weak.

In the survey, the vast majority of businesses expressed confidence the inflation rate would remain within the bank's target range of 1 to 3 percent over the next two years.

But over two-thirds said the rate hovering at the bottom end of that range, between 1 and 2 percent. Twenty-nine percent expected inflation of between 2 and 3 percent. (Editing by Peter Galloway and Bernadette Baum)

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