The Bank of Canada’s recent business outlook surveys, published on Monday, revealed that the Iran conflict negatively impacted business confidence and led to a surge in inflation expectations. These challenges prompted the central bank to introduce new metrics for monitoring sales and pricing trends in an increasingly unpredictable global environment.
According to the latest surveys, firms outside the oil and gas sector in the Prairies experienced rising input costs and heightened geopolitical uncertainty over the past three months, dampening sales projections. The percentage of businesses preparing for a potential recession in the coming year doubled to 17% in the second quarter, although it remains lower than levels observed in 2025.
Despite these concerns, businesses reported reduced uncertainty related to trade disruptions with the United States, leading to improved export prospects driven by increased commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses surged in the second quarter, largely influenced by escalating energy prices linked to the Middle East tensions.
The central bank highlighted that projected price hikes reached a four-year high in the last quarter, with most surveys conducted in May during heightened uncertainty surrounding the Iran conflict. Subsequent surveys indicated that inflation expectations peaked in April but subsided after a peace agreement was signed in mid-June.
Consumer spending intentions slightly declined in the past quarter, particularly among households anticipating higher prices due to the Middle East conflict. These cautious consumers adjusted their behavior by seeking discounts, reducing driving, and delaying major purchases.
To better assess economic indicators, the Bank of Canada announced the division of its benchmark indicator into two separate measures to track firms’ expectations for sales, hiring, and investment, as well as input and selling prices, wages, and inflation. This move aims to provide clearer insights during periods of conflicting economic signals, such as those triggered by events like the Iran conflict.
Economists, including BMO’s Robert Kavcic, noted the challenges faced by the central bank in deciding whether to adjust interest rates to stimulate growth or combat inflation. However, with expectations for inflation easing due to lower global oil prices, the Bank of Canada is likely to maintain its benchmark interest rate at 2.25% in the upcoming decision on July 15.
