BoC expected to hike rates following upbeat poll

Firms eye growth, investments despite labour shortages, capacity pressures

OTTAWA Expectations of a tightening labour market in 2018 is helping fuel speculation that the Bank of Canada will raise its overnight interest rate later this month, a belief that has rapidly gained traction following a better-than-expected jobs report last week.

In its Business Outlook Survey released Monday, the bank found that businesses plan to expand their operations and boost investment over the next year, even as they expect increased labour shortages and capacity pressures.

Analysts say the survey results appear to restrict options for Bank of Canada governor Stephen Poloz, who has assumed a decidedly more data-driven approach to future rate decisions. The survey shows Canada’s labour pool tightening, just days after it released a jobs report that some economists called “spectacular.” The bank had repeatedly said that still-low wage growth was one of the major factors that could postpone higher interest rates.

“It’s hard to actually see them not hiking,” said Avery Shenfeld, the senior economist for CIBC Capital Markets. “They would have to have a twisted logic.”

According to the survey, 46 per cent of respondents expect more intense labour shortages in 2018 compared with last year, while only 11 per cent see less intense shortages.

That comes after Canada posted 78,600 new jobs in December, while unemployment fell to a historic low of 5.7 per cent.

Forty-four per cent of respondents said they would have difficulty meeting an unexpected rise in demand, while 12 per cent said they would have “significant” difficulty. The total number of businesses who would have difficulty meeting unforeseen demand is the highest since the fourth quarter of 2007, according to past survey results.

“This survey paints a picture of an economy that is close to its non-inflationary capacity,” Shenfeld said.

The survey also found that 48 per cent of respondents expected to boost investment in 2018, while 19 per cent they would reduce capital spending plans.

Employment is expected to rise, with 50 per cent saying they will grow their workforce and 11 per cent saying they would cut back. Employment is expected to grow in all regions of Canada except some oil-dependent Prairie Provinces.

“Capacity and labour pressures are becoming more apparent and are stimulating firms’ employment and investment plans,” the bank said in its report.

The quarterly Business Outlook Survey is based on interviews with senior managers at roughly 100 Canadian firms.

Considering a more positive wage outlook and expected uptick in business investment in 2018, “the picture that emerges is one of economic strength,” TD Bank Group senior economist Brian DePratto said in a note.

“While the spectre of a poor outcome from NAFTA renegotiations continues to hang over business leaders, healthy US demand and a supportive loonie were also reported as supporting the business outlook.”

Still, analysts say the central bank has some wiggle room in future decisions, as inflation expectations remain below the bank’s target. The strength of the loonie could also influence the decision next week.

“We’re not yet seeing an inflation problem, but an economy that needs to slow a bit to avoid an inflation problem,” Shenfeld said. “They still have the luxury of taking their time.”

Poloz has in recent months given himself breathing room on future fixed rate decisions, saying last September the bank would rely heavily on data rather than a prescribed approach. He said at the time that there was “no predetermined path” for interest rate decisions, due to an uncommonly high level of volatility in the global economy.

The bank has repeatedly said that high housing prices and high household debt levels are of particular concern. Poloz repeated those concerns in a Dec. 14 speech to the Toronto Club of Toronto titled “Three things keeping me awake at night.” Cyber-security threats and a tough job market for young people were two other areas of angst.

The Bank of Canada will make its decision Jan. 17.