By Fergal Smith

TORONTO Canada's manufacturing sector remained in contraction for a sixth straight month in October as reduced output and rising cost pressures contributed to confidence in the outlook dropping to a three-year low, data showed on Wednesday.

The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) rose to a seasonally adjusted 48.6 in October from 47.5 in September.

While that was a three-month high, a reading below 50 indicates contraction in the sector. The PMI has been below that threshold since May, which is the longest such stretch since February 2016.

"It was another disappointing month for the Canadian manufacturing sector, with output and new orders continuing to fall amid reports of underwhelming market demand," Paul Smith, economics director at S&P Global Market Intelligence, said in a statement.

Both the output and new orders indexes remained in contraction, at 46.9 and 48.3 respectively, although the pace of decline slowed.

Fuel was reported by firms contributing to higher costs, with the measure of input prices climbing to 55.1, its highest since April, from 50.4 in September.

"Perhaps most worrying is the pickup in input price inflation since September, which added to pressure on firms at a time of dwindling demand," Smith said

"Such pipeline pressures only reinforce the potential for interest rates to remain higher for longer."

The Bank of Canada last week left its benchmark interest rates on hold at a 22-year high of 5% while leaving the door open to more tightening to tame inflation that could exceed its target for another two years.

Worries about inflation and the elevated interest rates weighed on confidence. The future output index fell to its lowest since May 2020 at 56.9, down from 61.5 in September.

(Reporting by Fergal Smith; Editing by Chizu Nomiyama)