All six big banks now predicting central bank will raise rate on Jan. 17
Canadian companies remain optimistic about future sales despite some moderation from highs, and signs of capacity pressures and labour shortages have picked up, the Bank of Canada said on Monday in a survey that reinforces expectations for an interest rate hike.
Following broad-based strength in past sales, many companies expect stable sales growth or a return to a more sustainable pace and will expand operations to accommodate demand, the central bank said in its quarterly Business Outlook Survey.
While business sentiment in the winter survey moderated for the second straight quarter, investment and employment intentions rebounded since the autumn survey even amid increasing concern about the renegotiation of NAFTA.
CIBC chief economist Avery Shenfeld said the bank’s business outlook survey was the last piece of the puzzle for a rate hike this month.
“The results are in, and they are more than good enough,” Shenfeld said in a note. “Overall, enough in here on the plus side to cement the case for a rate hike later this month.”
The Bank of Montreal, the only Canadian bank not predicting a Jan. 17 rate hike last week, changed it forecast after seeing the survey Monday.
“The Bank of Canada’s latest quarterly Business Outlook Survey is healthy enough to convince us that the Bank is likely to hike rates as early as next week’s decision,” said chief economist Douglas Porter.
“Firms remain generally upbeat on the outlook, despite concerns surrounding NAFTA and minimum wage hikes, while capacity has all but been eliminated outside of oil-heavy regions. The Bank of Canada will take this as a loud hawkish signal ….”
Pressure on production capacity continued, with the share of firms reporting they would have some or significant difficulty meeting an unanticipated increase in demand hitting its highest level since the 2008-2009 recession, the bank said.
Labour shortages are more intense than they were a year ago, with the exception of energy-producing regions, while inflation expectations were modest and unchanged from the third quarter.
“Survey results suggest that economic slack is now largely limited to the energy-producing regions,” the bank said.
The business survey added to evidence of a tightening job market after back-to-back employment reports showed strong hiring, boosting expectations the bank will continue to raise interest rates to head off inflation after two hikes in 2017. Chance of a rate hike on Jan. 17 have jumped to nearly 80 per cent after data on Friday showed the economy added almost 80,000 jobs in December for the second month in a row.
On the employment front, the survey showed labour shortages are most evident in occupations related to information technology, tourism and hospitality, and construction and real estate – areas that have seen strong demand.
Firms said they expect an increase in the price of input price growth, but anticipate no change in the pace of their sales price growth overall as competitive pressures dampen their ability to raise output prices.
Nodding to the debate surrounding minimum wage increases, the bank said firms in central Canada cited such hikes as the main driver of their wage growth expectations, followed by hiring competition.
“Rising labour costs, often related to upcoming increases in the minimum wage in several provinces, as well as other non-labor input costs, continue to put upward pressure on output prices,” the bank said in the report.