UPDATE 1-Capacity pressures, inflation cited in Bank of Canada Q1 business survey

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OTTAWA, April 9 (Reuters) - Canadian companies remain optimistic about sales, and capacity and labor pressures are evident in most regions, the Bank of Canada said on Monday in a report that reinforced expectations for further interest rate hikes.

Inflation expectations picked up, partly driven by rising labor costs, and the view that labor shortages have intensified over the past year was widespread, the bank said in its quarterly survey of businesses. In particular, firms in British Columbia and Central Canada described hiring conditions as difficult.

While U.S. protectionism has delayed some investment, strong demand from south of the border is seen boosting sales, the central bank said in the survey that showed continued positive business sentiment after a strong 2017.

Intentions to increase investment are widespread, though slightly lower than the previous survey, and firms on balance anticipate capacity pressure to intensify over the next 12 months, the bank's Business Outlook Survey showed.

In a separate survey of loan officers, the bank said demand for low-ratio and home equity lines of credit (HELOCs) increased slightly in the first quarter, driven by recent changes to underwriting standards, and respondents expect a decrease in the demand in the next quarter.

The Bank of Canada has raised rates three times since July 2017 and is expected to hike at least one more time in 2018, but policymakers are watching the impact of higher borrowing costs on Canada's highly indebted households and possible fall-out from the renegotiation of the North American Free Trade Agreement.

The closely watched Business Outlook Survey showed a mixed response to the protectionist trade policy and rhetoric from U.S. President Donald Trump, as companies braced for strong U.S. consumer demand but feared disruption to exports.

"While firms' expectations for U.S. economic growth have strengthened further, some cited rising protectionism and reduced competitiveness as factors limiting the impact on their sales," the bank said in the survey.

Labor-related constraints continue to be the biggest obstacle to scaling up operations, the survey showed, while remaining economic slack appears to be mostly concentrated in the energy-producing regions.

Firms expect faster input price growth overall, but only modest growth in output prices as competitive pressures limit their ability to pass on their costs to customers.

While most firms expect inflation will remain within the Bank's 1-to-3 percent target range, just over half now expect inflation to be in the upper half of that range, the bank said. (Reporting by Andrea Hopkins and Leah Schnurr; Editing by Andrea Ricci)