By Promit Mukherjee and David Ljunggren

OTTAWA (Reuters) -Canadian firms are still seeing weak demand and slow sales growth but conditions improved marginally in the third quarter and could be boosted by rate cuts, according to a Bank of Canada survey released on Friday.

Over the next 12 months, 43% of businesses expect the rate of increase in sales volumes to be better than the previous 12 months, with 30% predicting a decline, the third quarter business outlook showed. 

Analysts and economists, who see the survey as the most up-to-date marker of business and consumer sentiment, say it will help the central bank decide on the size of its rate cut later this month.

“Businesses continue to experience muted inflationary pressures: demand is weak, firms have excess capacity and price growth continues to slow,” the survey said. 

The BoC has trimmed its key policy rate by a cumulative 75 basis points since June and financial markets are fully pricing in another 25 basis point cut on Oct. 23, with almost 36% odds of a super-sized 50 basis point cut.

The bets for a 50 basis point cut had dropped sharply after jobs data earlier in the day, as Statistics Canada reported that the economy added a net 46,700 jobs in September and the unemployment rate decreased for the first time in eight months. 

But the business survey helped firm up the bets again to above 50%. 

“The survey points to an economy clearly in need of rate relief, and leans towards the Bank needing to take a larger step,” Ali Jaffery, senior economist at CIBC Capital Markets, wrote in a note.

The inflation data for September, due next week, will be the last main dataset before the BoC’s monetary policy decision and will be a key number in firming up expectations about the size of the rate cut on Oct. 23, economists said. 

The business outlook indicator – a broad gauge of how firms feel about their prospects – improved to -2.31, the seventh consecutive quarter it had been below zero. Over the last four quarters though it has become gradually less negative. 

“Firms largely attribute the improvements in demand indicators this quarter to the two interest rate cuts (in June and July),” the survey said. The bank also cut rates in September. 

BoC Governor Tiff Macklem said last month that the central bank was increasingly balancing the risks that inflation could fall below its target amid high interest rates. The Bank aims to keep inflation at 2%, the mid-point of its 1-3% target range.

The survey showed that 15% of businesses expected inflation to stay above 3% over the next two years, a substantial drop from 41% in the previous quarter.

But intentions to invest over the coming year remained largely unchanged with most firms holding off until demand picks up or financing costs fall. 

Businesses expect wage growth, which has been a sore point in BoC’s fight against inflation, to slow over the next year.

A separate survey of consumer expectations showed that 49% of Canadians expect a recession over the next year, a tad lower than 51% in the second quarter.

(Reporting by Promit Mukherjee and David Ljunggren in Ottawa, Editing by William Maclean)

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