Iran war drove inflation expectations up, hurt business confidence: BoC

The persia state of war both hampered business organization trust and sent rising prices expectations soaring, the Bank of Canada revealed in a new set of business outlook surveys published Monday.

Those opposing forces on the economy also pushed the central bank to introduce new metrics for tracking sales and price activity in an increasingly shock-prone world.

The Bank of Canada's latest surveys show that input costs and geopolitical uncertainty were on the rise over the past three months, hurting sales expectations for most firms outside the oil and gas sector in the Prairies.

The share of businesses bracing for a recession to hit the economy in the year ahead jumped to 17 per cent in the second quarter, nearly double the nine per cent recorded in the previous three months. The bank noted this measure is still lower than levels seen in 2025.

Firms were meanwhile reporting less uncertainty tied to the trade disruption with the United States, and the outlook for exports improved to well above historic averages on the back of higher commodity prices and demand for artificial intelligence inputs.

Inflation expectations among businesses soared in the second quarter alongside spiking energy prices tied to the Middle East conflict.

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The magnitude of those projected price hikes hit a roughly four-year high last quarter, according to the central bank.

The bulk of the Bank of Canada's surveys were conducted in May, when uncertainty over the course of the Iran war was high.

Follow-up surveys conducted in later weeks showed inflation expectations peaked in April, then declined further after the signing of a peace deal in mid-June.

"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.

In the Bank of Canada's separate survey of consumers also released Monday, inflation expectations also ticked up with a growing number of respondents pointing to energy prices as the cause. Tariffs and other trade-related disruptions remain the top driver of inflation in consumers' eyes, however.

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Consumer spending intentions edged lower this past quarter, the central bank said, particularly among households who expected the Middle East conflict to push prices higher.

These wary consumers were more likely to look for discounts at the grocery store, drive less and hold off on major purchases, the survey showed.

The Bank of Canada is splitting its benchmark indicator into two new measures to separately track firms' expectations for sales, hiring and investment and another for input and selling prices, wages and inflation.

Historically, those indicators have moved roughly in lockstep: when businesses' outlooks for sales fall, price pressures tend to ease, and vice versa.

But a central bank briefing on Monday noted that some shocks like the Iran war can send those two metrics in opposite directions.

"A single summary measure cannot communicate both signals at the same time," read a background document given to reporters.

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"Using separate indicators for activity and prices makes these episodes easier to interpret, and the relative movement between the two sheds light on the nature of economic shocks."

Kavcic said the latest batch of outlook surveys shows the dilemma the Bank of Canada was in over the past few months — unable to decide whether the economy needed lower rates to boost activity or higher rates to guard against inflation.

But he said inflation expectations should recede this quarter with global oil prices now well off their peak, leaving the central bank content to wait on the sidelines for the rest of the year.

The Bank of Canada is widely expected to hold its benchmark interest rate steady at 2.25 per cent at its upcoming decision on July 15.

Reporter

Craig Lord is a reporter with The Canadian Press.

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