UPDATE 2-Bank of Canada survey shows subdued business sentiment

(Adds details, analyst comment, background)

OTTAWA, July 4 (Reuters) - Canadian business sentiment remained subdued in the second quarter, as the drag of cheaper oil and modest domestic demand canceled out the boost from foreign demand, the Bank of Canada said on Monday.

The central bank’s quarterly Business Outlook Survey is the latest sign the economy is still struggling with the energy sector slump. The bank is widely expected to leave policy unchanged at its July 13 interest rate announcement.

The survey, concluded before Britain’s shock vote to leave the European Union on June 23, reported a sharp divergence between companies hit most directly by low oil prices and those not affected by the sector’s woes.

“The Bank of Canada’s wait-and-see stance is well justified by these results, but they aren’t yet worrisome enough to give thoughts to another rate cut,” Avery Shenfeld, chief economist for CIBC Capital Markets, wrote in a report to clients. The central bank cut interest rates twice last year.

Expectations for the next rate hike have been pushed back to the first quarter of 2018, according to a Reuters poll of primary dealers last week, who expect Brexit to weigh on Canada’s economy.

The overall balance of opinion on investment in machinery and equipment pointed to modest increases in the next 12 months, said the survey. Firms tied to the energy sector and affected regions planned to curtail investment spending, while even exporters unaffected by low oil prices were looking forward to only modest increases in investment.

Firms generally planned to add jobs over the coming year but hiring intentions remain below post-recession levels. Companies that are part of the energy supply chain are looking to cut jobs while the service sector is looking to hire.

Businesses expect only a marginal acceleration in sales growth over the next 12 months. A weaker Canadian dollar should boost growth of export sales, the survey said.

“For many firms, however, foreign demand is insufficient to offset weakness coming from their domestic customers and, in some cases, refocusing sales efforts towards export markets is proving difficult,” the survey said.

Businesses said credit conditions eased over the past three months, with firms citing improved market receptiveness to new debt or equity issuance.

A separate survey of senior loan officers also found that overall business lending conditions tightened slightly in the second quarter. The reports of tighter conditions were concentrated among firms with energy sector exposure. (Reporting by David Ljunggren; Editing by Frances Kerry and Leslie Adler)