Canadian companies have trimmed their expectations for inflation after a truce in the Middle East and a reduction in trade-related worries, according to the Bank of Canada usiness outlook survey released on Monday. The central bank characterizes the quarterly polling as a tool to gauge how trade uncertainty filters through to inflation, employment and overall business activity as policymakers approach their next rate decision in three weeks.
Money markets and economists currently expect the Bank of Canada to hold its policy rate at 2.25% through the end of the year, a backdrop against which the survey results will be evaluated.
The main survey was conducted in May, prior to the United States signing an interim agreement with Iran. In that initial polling period, firms highlighted concerns that elevated gasoline prices would weigh on demand, growth, sales and prices. A later, separate follow-up of business leaders indicated those specific concerns were diminishing.
"Inflation expectations have declined, with the lowest expectations of the quarter recorded in the period after the signing in mid-June of the interim agreement between the United States and Iran," the survey stated, citing the post-signing follow-up responses.
The conflict between Iran and partners in the region had previously reversed a trend of improving business sentiment that had persisted for three consecutive quarters. Respondents reporting that they planned or were budgeting for a recession in Canada over the next 12 months rose to 17% from 9% earlier in the survey cycle, reflecting heightened near-term downside risk assessments among a subset of firms.
Measures of current business prospects also shifted. The Bank of Canada usiness outlook indicator, which captures firms ssessments under prevailing economic conditions, fell to -0.39. That reading represents the first quarterly decline in three quarters, although it remains above the -2.41 figure recorded a year earlier.
Taken together, the survey results provide a mixed picture: inflation expectations have moderated following developments in the Middle East and easing trade tensions, but a larger share of firms are now preparing for recessionary conditions, and the overall outlook indicator has slipped from recent highs while still outperforming last yearigures.
Context and next steps
Policymakers are expected to consider these shifting business expectations when deciding on the next policy move in three weeks. The survey data offer a window into how changes in geopolitical risk and energy prices are filtering into corporate planning and price-setting behavior.