Bank of Canada surveys show war boosted inflation expectations, investment

(Bloomberg) — The war in Iran caused a spike in Canadian inflation expectations and is leading the country’s oil producers to boost their investment and production plans.

Survey data released Monday by the Bank of Canada show businesses and consumers expected a quickening pace of price increases in the second quarter, coinciding with rising tension in the Middle East that pushed energy and domestic gas prices higher.

Some 44% of respondents in the business survey saw inflation rising by more than 3% over the next two years, up from 11% of respondents in the first quarter. Firms also expect major increases in selling and input prices. Consumers’ expectations of two- and five- year inflation rose to 4% and 3.4% respectively.

The bank conducted follow-up surveys after a tentative peace deal was arranged between the U.S. and Iran. That data showed firms’ inflation expectations easing somewhat as global energy prices and domestic gasoline prices fell, policymakers said.

At their last meeting, Bank of Canada policymakers said the combination of economic slack and higher oil prices poses a “dilemma” and complicated their decision-making. The survey data underscore the bank’s challenge — tariffs and global conflict are sapping the country’s economic strength while adding to upside inflation risks.

“More firms reported that rising input costs and geopolitical uncertainty caused by the war in the Middle East are weighing on business conditions,” the bank said.

The surveys, which also took place before the Trump administration opted to begin annual reviews of the free trade agreement between U.S., Canada, and Mexico on July 1, showed softer business sentiment. The bank’s business outlook survey indicator was minus 0.39, slightly weaker than the first quarter.

The bank also split the indicator into two new measures — tracking activity and prices — that it will publish alongside the main indicator going forward.

“The two indicators have diverged: higher oil prices are putting upward pressure on firms’ price outlooks while weighing on the activity outlooks for firms outside the Prairies,” the bank said.

And while investment intentions across the country rose slightly, the surge in world energy prices also led conventional and oil sands-producing firms to ramp up capital spending plans.

“Prices are anticipated to remain above pre-war expectations because of ongoing supply disruptions and heightened geopolitical risks,” the bank said.

“Most conventional and oil sands producers can increase capital expenditures and production while meeting other priorities,such as paying dividends and reducing debt.”

The consumer survey showed Canadians’ concerns about high prices and economic uncertainty are holding back their spending plans. The bank said consumption plans are weaker among those who see the Middle East significantly raising inflation.

“These households are more likely than others to substitute for cheaper essentials, curtail discretionary spending and drive less,” the bank said. Consumers’ perceptions about the labour market “improved modestly,” the bank said.

Economists in a Bloomberg surveys see policymakers holding borrowing costs steady for the rest of 2026. The bank next sets rates July 15.

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