By Paul Vieira


OTTAWA--Canadian businesses anticipate raising workers' wages over the next 12 months to attract and retain workers as labor shortages intensify, according to the latest quarterly business-outlook survey from the Bank of Canada published Monday, which likely increases pressure on the central bank to raise rates.

Labor shortages and supply-chain disruptions are among the factors that businesses say will hurt their ability to meet robust domestic and foreign demand, the survey indicated. These constraints will compel companies to raise their prices for goods and services over the next six months, businesses suggested.

"More firms reported impacts from labor shortages and supply-chain disruptions, including a continued drag on their sales. Reports of capacity pressures were widespread," the survey said.

The findings will weigh on Bank of Canada officials as they contemplate rate increases in the coming months to quell inflationary pressure. Its next policy-rate decision is on Jan. 26, and some economists say it is time for the central bank to begin raising its benchmark rate next week. Bank of Canada Gov. Tiff Macklem said last month that central bank officials were uncomfortable with inflation in the country at a near two-decade high, at 4.7%, and they possess the will and tools to bring it down to its preferred 2% target.

The Bank of Canada has repeatedly said it would maintain its policy rate, at 0.25%, until spare capacity is absorbed. In its October rate decision, it said that scenario would likely unfold in either the second or third quarter of this year. Some economists argue slack has largely dissipated.

"Official data and feedback from the business community have been suggesting full capacity for some time. In Canada, the share of firms with difficulty meeting demand has never been higher," Robert Kavcic, economist at BMO Capital Markets, said last week prior to the release of the Bank of Canada survey.

The bulk of the survey was done prior to a sharp rise in Covid-19 cases in Canada due to the Omicron variant, forcing the country's two biggest provinces to impose lockdown measures. Still, the findings on inflation will likely influence the central bank's next policy decision.

"Although Omicron will dent the start of 2022 and the uncertainties on how long that will last could keep the Bank of Canada from hiking this month, assuming we're waving goodbye to it in March, that will set the stage for a first hike no later than April," said Avery Shenfeld, chief economist at CIBC Capital Markets.

The survey said a majority of companies, 80%, intend to raise wages at a faster rate in the next 12 months. "As labor shortages have intensified, the need to attract and retain workers has become the main driver of wage pressures," the survey said. Higher wages would leave workers with more spending power, thereby putting pressure on prices for scarce goods.

Companies said labor shortages are intensifying due to strong demand for workers, aging demographics, and employees' insistence for more flexible arrangements. "Firms expect that some of these factors may have a lasting impact, generating persistent tightness in labor markets."

In response, 43% of companies said they plan to pass on these higher costs to customers with price increases at a faster pace relative to the previous 12 months. Furthermore, 62% of companies said their capital spending plans--primarily on machinery, equipment and buildings--would accelerate at a faster rate over the next 12 months compared to the previous year.

Inflation expectations remain elevated, with two thirds of respondents expecting annual inflation of 3% and higher over the next two years.

As for sales prospects, the central bank said forward-looking indicators such as order books and customers' inquiries suggest the sales outlook remains strong over the next 12 months, especially for companies in real estate, retail and manufacturing. "However, further growth in sales for other firms in these sectors is increasingly held back by supply-side constraints," the central bank said.


Write to Paul Vieira at paul.vieira@wsj.com


(END) Dow Jones Newswires

01-17-22 1132ET