The Bank of Canada says more businesses than usual expect their sales to decline as most firms and consumers expect a recession in the next 12 months.

The central bank released its fourth quarter business outlook and consumer expectations surveys Monday, giving some insight into how high inflation and interest rates are affecting Canadian consumers and businesses.

As business confidence weakens, more firms are reporting demand and credit are pressing concerns.

Meanwhile, they say cost pressures, labour shortages and supply chain issues are easing.

As inflation and interest rates take a bite out of paycheques, consumers say they’re cutting back on spending.

Nearly nine in 10 say they have cut spending on travel, accommodation, food service and recreation.

More than seven in 10 say they’re cutting on clothing and footwear, while nearly six in 10 consumers are pulling back on groceries.

The surveys “suggest that interest rate increases are working as expected in slowing spending,” CIBC’s executive director of economics Karyne Charbonneau wrote in a note to clients.

Since March, the Bank of Canada has aggressively raised interest rates seven consecutive times. Its key interest rates is currently 4.25%, the highest it’s been since 2008.

Higher interest rates are expected to slow the economy down as people and businesses pull back on spending.

Businesses appear to expect sales to slow and are pulling back on their investment plans in response to the current economic climate.

According to the business outlook survey, two-thirds of firms expect a recession in the next 12 months.

However, despite the expected slowdown, half of businesses said they’re planning to add employees or to fill vacant positions in that same time period.

Meanwhile, 72% of consumers expect a recession in the months ahead.

Canadian workers have seen their real wages fall amid high inflation. According to the consumer expectations survey, most workers do not expect their earning to catch up with inflation.

The surveys also show both businesses and consumers expect inflation to remain elevated in the short-term but expect it to ease, sitting closer to the central bank’s target of 2% in five years.

More than a quarter of consumers expect to see deflation in five years with many believing prices will decrease as the economy recovers from supply-side shocks.

The Bank of Canada will make its next interest rate decision on Jan. 25.

Many commercial banks, including RBC, expect the bank to raise its key rate by a quarter of a percentage point.

“I don’t think that’s that’s changed with this data,” said RBC assistant chief economist Nathan Janzen.

Statistics Canada will release its December consumer price index report Tuesday, which will also inform the central bank’s decision, Janzen said.