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Bank of Canada sees high business optimism, market eyes rate hike

By David Ljunggren
A jogger runs past the Bank of Canada building in Ottawa, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie

By David Ljunggren

OTTAWA (Reuters) - Canadian business optimism remained at near record-levels in the third quarter, the Bank of Canada said on Monday in a report likely to cement market forecasts of another interest rate increase next week.

The central bank's quarterly survey of businesses showed that companies reported rising pressure on capacity, labor and prices amid signs of stronger sales.

"The indicator of future sales growth increased and is positive, suggesting a faster pace of growth over the next 12 months," the survey said, citing continuing strength in both domestic and export demand.

The Bank of Canada has raised rates four times since July 2017 and most market players expect another hike on Oct. 24. Governor Stephen Poloz said on Sept 27 that he did not want to let inflation momentum build.

Toronto-based Capital Economics said in a note the survey

"shows that growing capacity constraints are boosting investment intentions, which will reinforce expectations that the Bank will raise interest rates again at next week's policy meeting".

Market expectations of an interest rate hike next week, as reflected in the overnight index swaps market, strengthened slightly to 90 percent.

The Canadian dollar strengthened to a five-day high of 1.2988 to the U.S. greenback, or 76.99 U.S. cents.

Most firms said they expected to benefit from healthy U.S. household demand and robust business investment. Others noted the effect of U.S. tariffs on metals that were imposed in June.

"Many businesses reported upward pressure from tariff increases, particularly those on steel and aluminum, and higher prices for various commodities," the survey said.

All the interviews were carried out before Canada and the United States struck a deal on Sept. 30 on a new trade pact with Mexico.

Many firms reported increased investment spending in response to capacity pressures and anticipated strength in demand. For the sixth consecutive quarter, firms reported labor shortages were more intense than they had been a year earlier.

The survey revealed widespread plans among firms to boost their investment spending in response to capacity pressures and anticipated strength in demand.

The percentage of firms reporting they would have some or significant difficulty meeting an unexpected increase in demand stayed elevated, in part due to trouble finding staff.

Input prices are expected to grow at a faster pace over the next 12 months.

(Reporting by David Ljunggren; Editing by Bill Trott and Sandra Maler)