Those expectations eased once a Middle East ceasefire took hold, the Bank of Canada found
Canadian business leaders expect inflation to run above 3 percent over the coming year, though those expectations eased once a Middle East ceasefire took hold, according to Bank of Canada surveys released Monday that arrive just over a week before the central bank's next rate decision.
The quarterly Business Outlook Survey found firms expect inflation of 3 to 3.5 percent both one year out and over the next two years, the central bank said, with the magnitude of projected price increases hitting roughly a four-year high.
Expectations peaked in April and then declined, reaching their lowest point of the quarter after the United States and Iran signed an interim agreement in mid-June to end the war, the survey noted.
Money markets and economists expect the Bank of Canada to hold its benchmark rate at 2.25 percent on July 15, Reuters reported.
Business sentiment reversed after climbing for three straight quarters, the survey showed.
The share of firms planning or budgeting for a recession over the next 12 months jumped to 17 percent from 9 percent, according to the central bank, though that reading sits below levels seen through 2025.
The bank's business outlook indicator fell to -0.39, its first decline in three quarters, but held well above the -2.41 recorded a year earlier, Reuters reported.
For the first time, the Bank of Canada split its benchmark gauge into two measures, one tracking activity such as sales, hiring and investment, and another tracking prices, wages and inflation.
"A single summary measure cannot communicate both signals at the same time," read a background document given to reporters, as per CTV News.
The activity indicator declined on a weaker sales outlook, while the price indicator rose on expectations for higher inflation and stronger growth in input and selling prices, the central bank said, a split it linked to the supply shock from the war.
Nearly three-quarters of firms reported rising costs tied to higher fuel prices from the Iran war, according to Financial Post.
About one-fifth cited cost pressures from US tariffs and trade policies, a smaller share than the prior quarter, the central bank said.
Among firms facing war-related cost increases, roughly 40 percent are not passing them on to customers and about 25 percent only partially, while close to one-third plan to pass them on fully over the next year, the survey found.
"Suffice it to say that some of the concerns over growth in this report and, especially on inflation, should be behind us," said BMO senior economist Robert Kavcic in a note to clients Monday, reported by CTV News.
Kavcic said inflation expectations should recede this quarter with global oil prices well off their peak, leaving the central bank able to wait on the sidelines for the rest of the year.
Export outlooks improved to well above the historical average, the Bank of Canada said, helped by higher commodity prices, demand for artificial intelligence data-centre inputs in the United States, and fewer firms reporting that American customers were holding back orders over trade-policy uncertainty.
In the oil and gas sector, West Texas Intermediate crude averaged US$101 per barrel over the bank's May consultation period against US$65 before the war, and producers revised investment and production plans upward, according to the central bank.
Financial markets point to WTI near US$70 by year-end, the report said, citing Shell plc's acquisition of Canada's ARC Resources Ltd as a sign of a more favourable investment climate.
Investment intentions stayed strong and broadly unchanged, while employment intentions weakened slightly and most firms continued to report spare capacity, the survey showed.
Hiring picked up in the Prairies on higher commodity prices but softened elsewhere.
In the companion Canadian Survey of Consumer Expectations, consumer spending intentions edged lower, particularly among households expecting the conflict to lift prices, the central bank said.
Around 44 percent of respondents expected to receive a one-time top-up to the Canada Groceries and Essentials Benefit, which the survey suggested may support spending among recipients, according to Financial Post.
