UPDATE 2-Canada businesses see inflation pressures growing

* Nearly 60 pct businesses see inflation at 2-3 pct

* Outlook generally positive; credit conditions easing

* Surveys reinforce July rate hike expectations
(Adds analysts, details)

By Louise Egan

OTTAWA, April 4 (Reuters) – Rising energy and food costs
will push consumer inflation in Canada toward the upper end of
the central bank’s comfort zone, business leaders said in a
survey released on Monday.

The results of the Bank of Canada’s first-quarter business
outlook survey could pressure the central bank to raise its key
interest rate by mid-year as it seeks to keep inflation at the
midpoint of its 1-3 percent target range.

Fifty-eight percent of the senior business managers who
participated in the poll predicted annual inflation between 2
percent and 3 percent over the next two years, up from 44
percent who thought that in the fourth quarter of last year.

The percentage who saw inflation at 1-2 percent, the lower
end of the range, fell to 21 percent from 47 percent. The
majority still see CPI staying within the accepted range.

Analysts said growing price pressures could force the bank
to raise interest rates as early as July.

“Stronger growth along with indications of rising
inflationary expectations implies the growing need for the Bank
of Canada to return to tightening mode,” said Paul Ferley,
assistant chief economist at the Royal Bank of Canada.

Ferley sees a rate hike in July and a cumulative increase
of 100 basis points in the second half of this year.

Canadian inflation has been tame, bucking the trend in many
other countries. Annual inflation was 2.2 percent in February
while the core rate, which strips out volatile items, eased to
0.9 percent, its its lowest level since 1985.

The Bank of Canada last year became the first G7 country to
raise interest rates following the global financial crisis,
with three rate hikes. It has kept the benchmark rate on hold
since then and while analysts see almost no chance of a hike on
April 12, they are divided on the timing of the next move.

Yields on overnight index swaps, which trade based on
expectations for the central bank’s key policy rate, have fully
priced in a rate hike by September.(BOCWATCH: Quote, Profile, Research)

MIXED BLESSING

Overall, companies remained upbeat about the economic
outlook, although the survey was done before the Japanese
earthquake hit or the Libya conflict flared up.

Respondents see sales growth speeding up, more investment
on machinery and equipment and more hiring.

But they were slightly less bullish than in the fourth
quarter, if only because the robust gains of the recent past
are unlikely to be repeated.

“No longer are businesses expecting massive surges in
demand like those seen in the early months of the recovery.
Rather, future gains are going to be more sustained and
moderate, consistent with a matured economic recovery,” said
Francis Fong, economist at TD Economics.

The global commodity boom appeared to be a mixed blessing
for Canada, a leading commodity exporter and top supplier of
oil to the United States. Some companies expressed concerns
that high food and energy prices would dampen consumer
spending, eating into their sales.

Commodity producers were the most optimistic in their
outlook, helped by higher prices on world markets. Their upbeat
mood was clouded only by concerns about the strong Canadian
dollar and increased foreign competition.

The bank described capacity constraints overall as
“average”, an improvement from recent quarters. In a March 1
rate announcement, it said that there was “considerable slack
in the economy.”

Businesses said credit conditions had eased in the past
three months due to lower borrowing costs and greater demand
for debt issuance.

A separate Bank of Canada survey of senior loan officers at
financial institutions also pointed to a net easing of business
lending conditions during the first quarter.
(Reporting by Louise Egan; editing by Peter Galloway and Rob
Wilson)

UPDATE 2-Canada businesses see inflation pressures growing