Sentiment among companies in Canada continued improving in January-March after marking the first rise in eight quarters in October-December but demand remains weak, leading price pressures and labour conditions to ease, which prompted fewer firms to plan unusually large or frequent price increases over the next 12 months, the Bank of Canada's quarterly Business Outlook Survey (BOS) showed."Firms reported that demand remains weak overall," the bank said."But there are some signs of returning optimism." Businesses are moderating their investment plans in response to high borrowing costs, persistently weak demand and easing capacity pressures, it said.

The business outlook indicator rose to minus 2.42 in the first quarter of 2024 from minus 3.09 in the fourth quarter and followed minus 3.46 in the third quarter, minus 2.26 in the second quarter, minus 0.98 in the first quarter of 2023 and plus 0.11 in the final quarter of 2022. Excluding the pandemic period, the third-quarter 2023 reading of minus 3.46 was the worst since minus 5.05 in the second quarter of 2009. The BOS indicator has declined from its record high of 5.63 hit in the fourth quarter of 2021. The indicator plunged to minus 6.02 in April-June 2020 from minus 0.61 in the previous quarter during the first wave of the pandemic. The entire time series of the indicator is revised after every release.

Short-term inflation expectations continued their gradual downward trend, the bank said. Firms believe that the BoC's past rate hikes are relieving upward pressure on inflation from demand and from capacity constraints while cost increases related to housing, food and wages are slowing the decline in inflation expectations.

In the latest survey, firms' inflation expectations over the next two years continued to moderate, but only gradually, to 3.0 percent in the January-March quarter from 3.2 percent in the October-December quarter, 3.3 percent in July-September and 3.5 percent in April-June 2023. It remains above the bank's 2 percent target. The share of firms expecting inflation to be above 3 percent over the next two years fell to 40 percent in the first quarter survey after edging up to 54 percent in the previous poll from 53 percent in the third quarter while that of firms foreseeing inflation to be between 2 percent and 3 percent rose sharply to 54 percent after being unchanged at 39 percent in the fourth quarter survey.

In its quarterly survey of consumer expectations for January-March, the BoC said near-term inflation expectations are little changed and remain well above the bank's target."Consumers link their perceptions of slowing inflation with their own experiences of price changes for frequently purchased items, such as food and gas." Canadians continue to feel the negative impacts of high inflation and high interest rates on their budgets, and nearly two-thirds are cutting or postponing spending in response, the bank said

Consumers' inflation expectations over the next two years fell to 3.76 percent in the March quarter from 3.94 percent in the December quarter, 4.04 percent in the September quarter and 3.93 percent in the June quarter. Their outlook for the coming year is 4.92 percent, little changed from 4.91 percent in the fourth quarter but down from 5.03 percent in the third quarter.

Ahead of their next policy rate announcement on April 10, the bank's policymakers will monitor more data including the release on Friday of March employment data and discuss for how long the bank should maintain the restrictive level of interest rates in order to guide inflation back to target. The jobs data is expected to indicate cooling but resilient labor market conditions, with the jobless rate seen ticking up to 5.9 percent from 5.8 percent. CPI data has shown consumer inflation eased slightly to 2.8 percent in February and 2.9 percent in January, matching the recent low hit in June 2023. By contrast, the GDP posted a robust 0.6 percent rise on the month in January and the advance estimate by Statistics Canada is a solid 0.4 percent gain, indicating the economy may show a faster pace of growth in the first quarter than the annualized 0.5% increase projected by the bank in January.

The Bank of Canada's (BoC) publishes a quarterly Business Outlook Survey based on a summary of interviews conducted by the Bank's regional offices with the senior management of about 100 firms, selected in accordance with the composition of Canada's gross domestic product (GDP). The survey's purpose is to gather the perspectives of these businesses on topics of interest to the central bank (such as demand and capacity utilisation) and their forward-looking views on economic activity. Since the BoC is charged with keeping inflation within a specified target range, information on price pressures is watched particularly closely.

The outlook survey is used to evaluate economic conditions prior to four Board meetings a year where the BoC sets interest rate policy. Although monetary policy is announced eight times a year, these reports are available only on a quarterly basis. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the survey portrays an overheating economy or inflationary pressures, the Bank of Canada may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the survey portrays economic difficulties or recessionary conditions, the Bank of Canada may see the need to lower interest rates in order to stimulate activity.