(Recasts, adds market reaction, economist quotes, background)
By Andrea Hopkins and Leah Schnurr
OTTAWA, Oct 16 (Reuters) - Canadian companies have seen capacity and labor market pressures intensify over the past year but that has not yet hit their ability to meet demand, the Bank of Canada said on Monday, underscoring expectations the bank will not raise interest rates next week.
While Canadian business sentiment is positive, investment and employment indicators softened, pointing to less widespread plans to increase investment and hiring, the central bank said in its quarterly Business Outlook Survey.
Firms reported that labor shortages are more intense than a year ago, pushing the labor shortage intensity indicator to its highest since the 2008-09 recession, but difficulties meeting demand and reports of binding labor shortages are not yet widespread.
The survey gives the central bank room to take its time tightening policy after hiking rates twice this year and is in line with an expected slowdown in growth in the second half of 2017, said Benjamin Reitzes, senior economist at BMO Capital Markets.
“The whole tone of the survey is exactly what the bank has said, which is still continued above-potential growth but not the type of growth we’ve had over the past year,” Reitzes said.
Bank of Canada Governor Stephen Poloz said over the weekend that growth will slow as the economy approaches full capacity. Canada’s economic performance in the first half of the year has put it at the top of the G7.
Markets see an 82.4 percent chance the bank will hold at its Oct. 25 meeting, little changed from before the report. The Canadian dollar briefly touched a nearly one-week low against the greenback before paring losses.
Odds for a hike in December are higher at 44.8 percent, while an increase in January is fully priced in.
The survey found foreign demand is lifting export prospects, with firms reporting improved orders from abroad compared to last year.
The upbeat foreign demand, along with higher capacity pressures means Poloz could deliver a more optimistic message next week and leaves a December rate hike in play, economists at TD Securities wrote.
Inflation expectations moved up but remain modest overall, the survey showed, as higher costs for labor and non-commodity inputs were offset by the recent strengthening of the Canadian dollar.
Somewhat more firms expect consumer price growth to be in the upper half of the bank’s target range, based on strong economic growth and minimum wage increases, though that is a minority view. (Reporting by Andrea Hopkins and Leah Schnurr; Editing by Marguerita Choy and Meredith Mazzilli)