The Bank of Canada released new business outlook surveys on Monday, revealing that the Iran war negatively impacted business confidence and led to a surge in inflation expectations. This prompted the central bank to introduce new metrics to monitor sales and price trends in an increasingly volatile global environment.
According to the latest surveys, input costs and geopolitical uncertainty increased over the past quarter, affecting sales expectations for most firms outside the oil and gas sector in the Prairies. The percentage of businesses preparing for a potential recession in the coming year rose to 17%, nearly double the previous quarter’s figure. However, this level remains lower than that seen in 2025.
On a positive note, firms reported reduced uncertainty related to trade disruptions with the United States, leading to improved export outlooks driven by higher commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses spiked in the second quarter due to rising energy prices linked to the Middle East conflict.
The central bank noted that projected price hikes reached a four-year high last quarter. Surveys conducted in May, during heightened uncertainty over the Iran war, showed a peak in inflation expectations, which later decreased after a peace deal was signed in mid-June.
Consumer spending intentions decreased in the past quarter, particularly among households concerned about potential price increases due to geopolitical tensions. These cautious consumers were more inclined to seek discounts, reduce driving, and postpone major purchases.
To better assess economic conditions, the Bank of Canada is splitting its benchmark indicator into two new measures to separately track firms’ expectations for sales, hiring, investment, and prices, wages, and inflation. This approach acknowledges that certain shocks, such as the Iran war, can impact these metrics differently.
Senior economist Robert Kavcic noted the bank’s dilemma in recent months regarding interest rates and inflation management. However, with global oil prices decreasing, inflation expectations are expected to ease this 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 at 2.25% during its upcoming decision on July 15.
