By Promit Mukherjee and David Ljunggren

OTTAWA, Jan 20 (Reuters) – Canadian firms see good demand and sales in the coming year, largely due to rate cuts, but are worried about potential damage from promised U.S. policies, the Bank of Canada said on Monday.

The Bank’s fourth-quarter business survey said overall business sentiment remained subdued. The survey is closely monitored by the BoC as it provides recommendations on the financial and lending objectives of the industry.

The business indicator – the expectation of economic activity – has risen to -1.18, its best position in the last five quarters but continued to be negative.

Only 15% of companies are planning for a recession in Canada in the coming year, up from 16% in the third quarter, it said.

“After a period of weak demand, companies expect their sales to improve in the coming year. This expectation is mainly driven by the recent reduction in interest rates and the expectation of further reductions,” it said.

The proposals were made from Nov 7-27, before the bank passed its most recent 50-point benchmark on Dec 11. US President Donald Trump pledged on Nov 25 to impose a 25% tariff on all Canadian imports when he took office.

An online survey of business leaders conducted by the central bank in December showed widespread uncertainty about the end of US policy, with 40% of respondents saying they expected the outcome to be negative.

The bank has cut rates by 175 basis points since June in an effort to address the weak economy and rising unemployment. Rates had risen for twelve years of 5% before the bank began to reduce policy.

“Companies’ investment targets for the coming year are wide-spread and above their historical record,” the BoC said in the survey.

But it warned that uncertainty surrounding US trade policy is preventing companies from taking action, although the energy sector may be different.

Companies have also said that in the next 12 months they expect their sales prices to increase but a positive change will allow them to pass the cost increase and restore margins.

The survey indicated that a larger than usual share of the industry is expected to result in lower employment in the coming year. However, they no longer see the need to reduce staff.

Canada’s economy added nearly four times the number of jobs forecast in December to its highest level in nearly two years, but unemployment remains at historic highs.

(Reuters Ottawa editor)