By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -More Canadian firms see inflation easing over the next two years than in the previous quarter, while the business outlook fell to its lowest level since the pandemic, the Bank of Canada said on Monday in a third-quarter survey.
About a third of firms expect a recession over the coming year, the same level as the previous quarter, the survey said.
The Bank of Canada has hiked rates 10 times since early 2022 to fight inflation but left rates at 5% at its Sept. 6 meeting, and noted the economy had entered a period of weaker growth. Its next policy decision is due on Oct. 25.
In a separate survey, 55% of consumers see a recession over the next year, up from 50% in the second quarter. Some 27% of businesses see it taking more than three years to bring inflation down to the central bank’s 2% target, down from 32%.
“Reports of softer demand are broad-based,” the survey said. “Signs indicate that pricing behavior is moving toward normal. … A continued softening in demand conditions is creating an environment where firms are less able to pass through input cost increases.”
The business outlook survey index – a broad gauge of how firms feel about their prospects – hit -3.51, the lowest since the -6.16 seen in the second quarter of 2020.
“The Bank of Canada’s aggressive rate hikes are working as intended, with both businesses and consumers expecting a slowdown in activity,” BMO Capital Markets economist Shelly Kaushik said in a note.
Some 53% of businesses see inflation remaining above 3% over the next two years, compared with 64% the previous quarter.
Bank of Canada Governor Tiff Macklem said last week officials would weigh whether to let previous hikes work through the economy, or raise rates again to counter sticky inflation.
Growth unexpectedly shrank in the second quarter and stalled in the first two months of the third, while core inflation has proven sticky.
The Canadian dollar was trading 0.2% higher at 1.3625 to the greenback, or 73.39 U.S. cents. Money markets see a 40% chance of a rate hike on Oct 25.
Even though rates are at a 22-year high, the central bank does not see inflation slowing to 2% until mid-2025.
Consumers’ inflation expectations for the next year eased slightly, though they remained at more than 5%. Canadians still perceive inflation to be much higher than it is – at 6.6% instead of the 4.0% recorded in August.
“For the Bank of Canada, consumers’ sticky inflation expectations are problematic,” said Royce Mendes, head of macro strategy at Desjardins Group. “Given that both businesses and households expect the economic environment to weaken, we don’t think there’s enough evidence to suggest that the economy requires higher interest rates.”
Wage pressures, closely watched by the central bank, are easing, though businesses still expect to make higher-than-normal wage increases over the next year, the survey showed.
Firms reported a widespread easing in the intensity of labor shortages, it added.
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