June 30, 2017 / 2:57 PM / 3 months ago

Bank of Canada sees upbeat business mood, setting stage for rate hikes

A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie - RTX37AVP

OTTAWA (Reuters) - Canadian companies are more optimistic about future sales and exports, while improving demand is driving capacity pressures that should boost investment and hiring, the Bank of Canada said in a report on Friday that increased expectations for a rate hike.

Firms expect sales growth to improve further after a pickup in the last 12 months, driven by strength in services and a bounceback in the commodity sector, the central bank said in its quarterly business outlook survey.

Overall, the survey suggested a continued recovery in business sentiment after two years of weakness, and it fed into expectations that the Bank of Canada will begin raising interest rates, possibly as early as next month.

“July is clearly on the table for policymakers, and if not July, then probably September or October,” said Royce Mendes, senior economist at CIBC Capital Markets.

Chances of a rate hike next month jumped to 57 percent after the survey was released, data from the overnight index swaps market shows.

They were just 20 percent after the consumer price index report last week showed that inflation was subdued. Canada’s 2-year yield rose to its highest since October, 2014 at 1.108 percent. The 2-year yield has soared 35 basis points since before Senior Deputy Governor Carolyn Wilkins’ speech on June 12 tipped the market to the central bank’s more hawkish stance.

The survey showed an indicator of hiring intentions reached a record high, and some firms believe competition for labor is starting to feed into wages.

“Respondents signaled that improving demand was the main factor pushing them closer to capacity, and labor-related constraints have become more prevalent,” the bank said.

While some firms mentioned emerging price pressures from inputs and companies want to pass on higher costs to rebuild margins as demand recovers, competition continues to restrain their ability to raise prices and inflation expectations edged down, remaining at the lower end of the bank’s 1 to 3 percent inflation control range.

Many firms said sustained U.S. demand boosted expectations for export growth from the modest level recorded in the previous survey, though uncertainty about future trade negotiations and U.S. protectionism continues to cloud the outlook.

The survey of about 100 firms showed capacity pressures and labor shortages are more intense compared with the last survey in April.

Additional reporting by Fergal Smith in Toronto; Editing by Bernard Orr and Tom Brown

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