Canada’s manufacturing sector continues to downshift, reinforcing the likelihood that the Bank of Canada will likely be cutting rates next year, says BCA Research.

In a research note, BCA reports that manufacturing shipments contracted marginally in October, as expected. “Though much of the recent weakness reflects falling energy prices, shipments in most sectors are below year ago levels, underscoring the breadth of manufacturing’s difficulties,” it says.

“Rising inventories point to production cutbacks in the months ahead,” the report says, adding, “In previous periods when inventory growth outstripped shipment growth, as is the case now, the Bank wound up cutting interest rates. The same is likely to occur next year, despite the fact that domestic demand growth is still solid.”

“The erosion in manufacturing points to Bank rate cuts in 2007, although the market looks overly aggressive in expecting 60 bps in cuts in the next year,” BCA concludes.