OTTAWA (Reuters) - Canadian businesses widely expect their input costs to rise as a result of the weaker Canadian dollar, but they’re not always able to pass on those higher costs to consumers because of intense competition, a central bank survey showed on Monday.
The currency has weakened significantly since the Bank of Canada stopped hinting at eventual interest rate hikes last autumn because of its worries over slow inflation.
But the results of the central bank’s first-quarter survey of business managers suggest inflation may still take some time to pick up speed. The inflation rate has stayed below the central bank’s 2 percent target for 22 months, and is currently the bank’s biggest concern.
Other results of the survey show companies still expect some improvement in sales, that they plan to invest more in machinery and equipment, and that hiring intentions were the strongest in almost two years.
The survey of senior management at about 100 companies from Feb 18 to March 13 painted a relatively upbeat view of economic growth over the coming 12 months after a weather-induced slowdown at the start of this year.
But the depreciation in the Canadian dollar against the U.S. dollar since October is a “double-edged sword,” said David Tulk, chief macro strategist at TD Securities.
“While the support to the export sector is indeed positive and should be reinforced further by a stronger outlook for the U.S. economy, the potential impact on inflation is less encouraging,” Tulk said in a note to clients.
The central bank said there was a “widespread view” expressed in the survey that the depreciation of the currency, while helping boost export sales, would raise the prices of products and services companies purchase. The Canadian dollar has fallen by about 7 percent against the U.S. dollar since last October.
Asked about the rate of input price inflation, 47 percent of businesses said they saw the rate increasing at a faster pace in the next 12 months than it did in the previous 12. That was up from 29 percent in the fourth-quarter survey. Ten percent saw prices increasing at a lesser rate for a balance of opinion - the difference between the two - of 37, versus 19 previously.
But the balance of opinion on output price inflation rose less dramatically, to 14 from 9.
“Some firms hope to be able to at least partially pass higher costs from the exchange rate depreciation through to output prices,” the bank said in its report. “For others, particularly businesses in Central and Eastern Canada, intense competition continues to exert downward pressure on output prices.”
More than 90 percent of companies surveyed said consumer inflation will remain within the Bank of Canada’s comfort zone of between 1 and 3 percent over the next two years, with 63 percent pegging it at the lower end of that range.
The survey results will feed into the Bank of Canada’s next interest rate decision and quarterly forecast, to be released on April 16. In January, the bank forecast it would take about two years for inflation to reach its target and for the economy to reach full capacity.
On April 16, the bank will likely extend a freeze on its main interest rate that has lasted for more than three years, holding it steady at 1.0 percent. Most analysts expect its first rate move to be an increase, but not until the second half of 2015.
Chronically weak inflation, or even disinflation, is the Bank of Canada’s biggest headache at the moment because it often means a stagnant economy.
But it has also said it is less worried by what it calls “good disinflation,” caused by a more competitive retail sector with the expansion of big discount stores such as Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N) in Canada.
Inflation slowed to an annual rate of 1.1 percent in February, down from 1.5 percent in January, but the underlying core rate was 1.2 percent.
Companies in the bank’s survey were relatively optimistic on sales, citing the weaker currency and a stronger U.S. economy as supporting growth as well as their own efforts to develop new products and increase their market share.
On hiring, some 53 percent said they expect to hire new staff in the next year, while 8 percent saw layoffs on the horizon. Twenty-three percent said labor shortages restricted their ability to meet demand, down from 26 percent, and shortages were cited in relation to hiring for specific positions, skill sets or regions.
While the survey showed pressures on business capacity were rising slightly, those reporting “some difficulty” or “significant difficulty” represented less than half of the businesses surveyed.
On investment in machinery and equipment, another area where the central bank hopes to see improvement, overall intentions were unchanged from the fourth quarter. Some manufacturers said they plan to increase investments, but other sectors said they plan to reduce spending.
Reporting by Louise Egan; Editing by Peter Galloway