By Fergal Smith
TORONTO (Reuters) - The Canadian services sector remained in contraction in February but the pace of decline eased as the prospect of interest rate cuts boosted firms' optimism in the outlook for the economy, S&P Global (NYSE:SPGI) Canada services PMI data showed on Tuesday.
The headline business activity index rose to 46.6 in February from 45.8 in January, notching its highest level since October but remaining below the 50 threshold that marks contraction in the sector. The index has been in contraction since June, the longest such stretch in three years.
"February's survey showed the continuation of a subdued Canadian service sector, characterised by declining output and new orders," Paul Smith, economics director at S&P Global Market Intelligence, said in a statement.
The new business index dipped to 47.0 from 47.1 in January as firms reported that financial constraints and lower disposable income weighed on client demand but the measure of future activity was at a 10-month high, climbing to 63.7 from 57.9.
Firms are "looking towards cuts in interest rates as being key to unlocking growth and raising activity in the next year," Smith said.
Investors expect the Bank of Canada to leave its benchmark interest rate on hold at a 22-year high of 5% on Wednesday but to then begin an easing cycle in April or June.
The S&P Global Canada Composite PMI Output Index, which captures manufacturing as well as service sector activity, rose to 47.1 in February from 46.3 in January, posting its highest level since September.
Data on Friday showed Canada's manufacturing PMI rising to a 10-month high at 49.7 last month.