The Bank of Canada’s latest Business Outlook Survey, released this morning, was little changed from the previous edition. Businesses are optimistic and inflation expectations remain muted, although economists see hints of higher rates in added capacity pressures.

The survey found that businesses remain broadly optimistic about the economic outlook, although regional differences are still significant. Western Canada is experiencing stronger demand and more evident capacity constraints than the rest of the country, it notes.

But, overall, businesses continue to report strong sales momentum and remain optimistic about future sales growth. Firms’ investment intentions “are quite robust, as they have been for the past few surveys”, the Bank notes.

However, the interesting tidbit for rate watchers is the Bank’s finding that “capacity constraints have moved back up to levels similar to those observed in the latter part of 2004”.

Partly on the strength of this, BMO Nesbitt Burns finds that the “survey carries a slightly more hawkish message for the policy outlook than last quarter’s survey”.

“The key question on spare capacity shows things have tightened again, with 43% reporting some or significant difficulty (versus 37% last quarter),” BMO Nesbitt says. “That is a relatively high reading — although it is below most of 2004’s elevated levels, when it averaged 45% from Q2 to Q4 — and is another sign that there is little spare capacity left. As well, more firms are reporting labour shortages (36% versus 33% last quarter), although again, this is below last year’s highs.

The Bank says that hiring intentions remain positive but have fallen somewhat from the peak reached in the last survey. As for inflation, “On balance, companies expect the prices of their inputs and outputs to rise over the next 12 months at a similar pace to that of the past 12 months. Inflation expectations have moved up but remain well within the inflation-control target range of 1% to 3%,” it says.

“The latest survey moderately ramps up the pressure on the Bank of Canada to get the tightening process back underway,” concludes BMO Nesbitt. “There is less spare capacity than at the start of the year, and the Bank will also take note that businesses are quite optimistic on the sales and investment outlook, and are gradually raising their inflation expectations.”

“However, the Bank will find some solace in the fact that capacity is not quite as tight as at its peak last year (when the Bank began to hike rates) and that plans to hike selling prices have faded. On balance, these results alone are unlikely to push the Bank off the sidelines, but there is enough here to strengthen the call for rate hikes by September,” it offers.

In another written commentary, National Bank Financial says that, “With the U.S. economy showing renewed vigour, the Bank may be forced to revise up its growth forecast. Under these circumstances, we would expect the Bank to up the ante by issuing a more hawkish statement at its next rate-setting meeting (July 12) and set the table for a resumption of its tightening campaign in early September.”