The Bank of Canada disclosed that the Iran war negatively impacted business confidence and led to a surge in inflation expectations, as revealed in its latest business outlook surveys released on Monday. These conflicting factors prompted the central bank to introduce new measures for monitoring sales and pricing activities in a volatile global environment.
According to the Bank of Canada’s recent surveys, input costs and geopolitical uncertainties increased over the past three months, affecting sales projections for most businesses outside the oil and gas industry in the Prairies. The proportion of companies preparing for a potential recession in the next year rose to 17 percent in the second quarter, nearly doubling from the previous quarter but still lower than levels observed in 2025.
On the positive side, businesses reported reduced uncertainty related to trade disruptions with the United States, with export prospects exceeding historical averages due to elevated commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses surged in the second quarter, driven by escalating energy prices associated with the Middle East conflict.
The central bank reported that projected price increases reached a four-year peak in the last quarter, with most surveys conducted in May during heightened uncertainty surrounding the Iran war. Subsequent surveys in the following weeks indicated a peak in inflation expectations in April, followed by a decline post the peace agreement signed in mid-June.
Consumer spending intentions slightly decreased in the past quarter, especially among households anticipating higher prices due to the Middle East conflict. These cautious consumers exhibited behaviors such as seeking discounts at supermarkets, reducing driving, and delaying significant purchases, as indicated by the survey.
To enhance economic tracking, the Bank of Canada is splitting its benchmark indicator into two new measures focusing on firms’ expectations for sales, hiring, investment, and pricing dynamics. This strategic move acknowledges that certain shocks like the Iran war can cause diverging trends in sales outlooks and pricing pressures, necessitating separate indicators for better interpretation.
BMO senior economist Robert Kavcic suggested that concerns regarding growth and inflation should diminish, particularly as global oil prices have receded from their peak, allowing the central bank to maintain a cautious stance for the rest of the year. The Bank of Canada is expected to keep its benchmark interest rate unchanged at 2.25 percent in the upcoming decision on July 15.