The Bank of Canada disclosed in its recent business outlook surveys published on Monday that the Iran conflict negatively impacted business confidence and sparked inflation expectations. This situation prompted the central bank to introduce new monitoring metrics amid a volatile global environment.
According to the latest surveys by the Bank of Canada, input costs and geopolitical uncertainties escalated in the past three months, leading to a decline in sales expectations for most firms outside the oil and gas sector in the Prairies. Approximately 17 percent of businesses are bracing for a potential recession in the upcoming year, nearly double the figure from the previous quarter but still lower than levels observed in 2025.
While firms reported reduced uncertainty related to trade disruptions with the United States, the outlook for exports improved significantly due to higher commodity prices and the demand for artificial intelligence inputs. Inflation expectations among businesses surged in the second quarter, largely driven by soaring energy prices associated with the Middle East conflict.
The central bank highlighted that the projected price increases hit a four-year high last quarter, with most surveys conducted in May during heightened uncertainty surrounding the Iran conflict. Subsequent surveys revealed that inflation expectations peaked in April but declined after a peace agreement was signed in mid-June.
Consumer spending intentions dipped in the past quarter, particularly among households concerned about potential price hikes due to the Middle East conflict. These cautious consumers were more inclined to seek discounts, reduce driving, and postpone significant purchases.
To enhance monitoring capabilities, the Bank of Canada is splitting its benchmark indicator into two separate measures to track firms’ expectations for sales, hiring, and investments, as well as input and selling prices, wages, and inflation. This decision aims to provide more nuanced insights, especially during economic shocks like the Iran conflict.
BMO senior economist Robert Kavcic noted that the recent surveys underscore the dilemma faced by the central bank in recent months, balancing the need for lower rates to stimulate activity against higher rates to combat inflation. With global oil prices retreating from their peak, Kavcic expects inflation expectations to ease in the current quarter, allowing the central bank to maintain a wait-and-see approach for the remainder of the year.
The Bank of Canada is anticipated to keep its benchmark interest rate unchanged at 2.25 percent during its upcoming decision on July 15.
