The Bank of Canada’s recent business outlook surveys, published on Monday, revealed that the Iran war had a dual impact on business confidence and inflation expectations. This led the central bank to introduce new metrics for monitoring sales and price trends in an increasingly uncertain economic environment.
The surveys highlighted a rise in input costs and geopolitical uncertainty over the last three months, which adversely affected sales expectations for most firms outside the oil and gas sector in the Prairies. Concerns about a potential recession in the upcoming year surged to 17 per cent in the second quarter, almost doubling from the previous quarter but still below levels seen in 2025.
While businesses reported reduced uncertainty related to trade disruptions with the United States, the outlook for exports improved significantly due to higher commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses also surged in the second quarter, primarily driven by escalating energy prices linked to the Middle East conflict.
The central bank noted that projected price hikes hit a four-year high in the last quarter, with most surveys conducted during a period of heightened uncertainty surrounding the Iran war. Subsequent surveys indicated that inflation expectations peaked in April and decreased after a peace deal was signed in mid-June.
Consumer spending intentions declined in the past quarter, especially among households anticipating higher prices due to the Middle East conflict. These cautious consumers were more inclined to seek discounts, reduce driving, and postpone major purchases.
To better capture business sentiment, the Bank of Canada is dividing its benchmark indicator into two separate measures: one tracking sales, hiring, and investment expectations, and the other focusing on input and selling prices, wages, and inflation. This shift acknowledges that certain shocks, like the Iran war, can lead to diverging trends in these two metrics.
BMO senior economist Robert Kavcic noted that the recent surveys reflected the central bank’s challenge in determining whether to adjust interest rates to stimulate economic activity or combat inflation. However, with global oil prices decreasing from their peak, inflation expectations are expected to ease, allowing the central bank to maintain a cautious approach for the remainder of the year.
The Bank of Canada is anticipated to keep its benchmark interest rate unchanged at 2.25 per cent in the upcoming decision on July 15.