OTTAWA (Reuters) - Canadian companies remain optimistic about sales growth despite trade uncertainties, the Bank of Canada said on Monday in a report that boosted the currency and reinforced expectations of further interest rate hikes down the line.
Intentions to increase business investment were widespread, though slightly lower than previously, and firms on balance expected capacity pressures would intensify over the next year due to strong sales prospects and expected difficulties finding workers, the first-quarter business survey showed.
While U.S. protectionism has delayed some investment, strong demand from south of the border is seen boosting sales, the central bank said in its closely watched survey that showed continued positive business sentiment after a strong 2017.
Still, some firms feared the lift from U.S. economic growth could be tempered by rising protectionism and reduced competitiveness.
The survey “indicates that the economy isn’t feeling all that much pain from the effects of policy changes in the U.S. and uncertainty about trade relations,” said Royce Mendes, senior economist at CIBC Economics.
“It remains to be seen if the opinions expressed here are borne out in hard data, which have yet to provide any clear direction.”
The Canadian dollar added to gains against the greenback following the release, touching a near six-week high. [CAD/]
The central bank has raised rates three times since July 2017 and markets see a nearly 80 percent likelihood it will hike again this July. Policymakers are watching how indebted households handle higher borrowing costs and how the North American Free Trade Agreement renegotiations fare. BOCWATCH
The survey showed inflation expectations over the next two years picked up, partly driven by rising labor costs, while the view that labor shortages have intensified over the past year was widespread.
In particular, firms in British Columbia and Central Canada described hiring conditions as difficult.
While most firms expect inflation will remain within the bank’s 1-to-3 percent target, just over half now expect inflation to be in the upper half of that range, the bank said.
In a separate survey of loan officers, the bank said demand for low-ratio and home equity lines of credit (HELOCs) increased slightly in the first quarter, driven by recent changes to underwriting standards. Respondents expect a decrease in demand in the next quarter.
Reporting by Andrea Hopkins and Leah Schnurr; Editing by Andrea Ricci and Matthew Lewis