The Bank of Canada reported that the Iran conflict impacted business confidence and led to increased inflation expectations, according to the latest business outlook surveys released on Monday. As a result, the central bank introduced new measures to monitor sales and pricing trends in an environment prone to sudden shocks.
The surveys highlighted a rise in input costs and geopolitical uncertainty over the past three months, particularly affecting sales projections for most firms outside the oil and gas sector in the Prairies. Concerns about a potential recession surged to 17 percent in the second quarter, nearly double the figure from the previous quarter, although still lower than levels observed in 2025.
Businesses reported reduced uncertainty related to trade disruptions with the United States, with an improved export outlook driven by higher commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses spiked in the second quarter due to escalating energy prices linked to the Middle East conflict.
The central bank noted a significant increase in projected price hikes, reaching a four-year high last quarter. Surveys conducted in May, amid heightened uncertainty surrounding the Iran conflict, were followed by a decline in inflation expectations post the peace deal signed in mid-June.
BMO senior economist Robert Kavcic indicated that concerns about growth and inflation should diminish following recent developments. In a separate consumer survey also released on Monday, inflation expectations rose, primarily attributed to energy prices, while tariffs and trade disruptions remained key drivers of inflation in consumers’ perceptions.
Consumer spending intentions dipped, especially among households anticipating price increases due to the Middle East tensions. Wary consumers were inclined to seek discounts, reduce driving, and delay major purchases. The Bank of Canada announced the division of its benchmark indicator into two new metrics to better assess firms’ expectations for sales, hiring, investments, and pricing trends.
The separate indicators are designed to capture fluctuations in sales and pricing trends, which may diverge during significant shocks like the Iran conflict. The central bank is expected to maintain its benchmark interest rate at 2.25 percent in the upcoming decision on July 15, given the recent developments in the global economy.