Bank of Canada Survey Records Notable Rise in Inflation Expectations -- 2nd Update

By Paul Vieira

OTTAWA--The deterioration of crossborder U.S.-Canada trade ties and continued Middle East tension has led to a sharp uptick in inflation expectations among Canadian firms, according to a quarterly business-outlook survey from the Bank of Canada.

Economists say the survey results could set the stage for a Bank of Canada interest-rate increase next week, the first hike in over three years, as the central bank frets about the spillover from higher energy prices and no sign of a breakthrough in the U.S.-Iran conflict.

Responses collected from Canadian companies after mid-August suggest firms anticipate inflation to hit 3.7% in the third quarter of 2027, or higher than the 3.2% forecast prior to the collapse of trade talks between Ottawa and Washington on tariff relief. The rise in inflation expectations is tied to elevated fuel costs and the imposition of new tariffs on U.S. and Canadian goods, the Bank of Canada said.

"Inflation expectations have increased noticeably," said the central bank survey published Monday.

The rise in inflation expectations among firms, and also consumers, could be a tipping point for senior Bank of Canada officials as they contemplate a possible hike in rates at its scheduled decision on Oct. 28. Canada's consumer-price index in September accelerated 3.1%, which was a tamer-than-anticipated pace but still well above the central bank's target of 2% inflation. Over the weekend, Bank of Canada Gov. Tiff Macklem said he was concerned that energy prices could keep rising and affect other prices more broadly, adding officials would need to ponder whether rate hikes are necessary to nudge total inflation down toward 2%.

In an accompanying survey of households, the Bank of Canada said long-term inflation expectations among consumers moved higher in the third quarter to match near-term levels. Consumers anticipate inflation in five years to sit at 3.91%, versus 3.39% in the previous quarter. Consumers expect inflation to hover over 4% in a year's time.

Royce Mendes, head of macro strategy at Desjardins Group, said the firm expects a Bank of Canada rate hike next week, with the prolonged period of elevated energy prices likely to outweigh downside risks from the trade row with the U.S.

"Businesses have faced elevated input costs for long enough that we now believe more broad-based consumer price increases are imminent," Mendes said, adding consumers' longer-term inflation expectations are now at their highest level since the Covid-19 pandemic period.

Yields on two- and five-year government of Canada bonds are higher Monday, reflecting expectations of higher interest rates. The Federal Reserve raised its benchmark borrowing cost in September, and analysts at UBS expect quarter-point hikes after Fed meetings in December and January.

The bulk of the responses from the quarterly business-outlook survey were collected prior to the collapse in U.S.-Canada trade talks in August, with officials from both countries saying their counterpart demanded last-minute adjustments that were not feasible. The U.S. slapped a new set of tariffs on a set of Canadian goods, and Canada countered with new duties of their own on some American imports.

The timing of the survey, with most responses collected before a breakdown in U.S.-Canada trade ties, makes it difficult to "glean clear signals from this report," said Shelly Kaushik, economist at BMO Capital Markets. She added BMO is now leaning toward a rate-increase call for next week.

Overall, the survey indicated firms expect their input prices to moderate but remain elevated. More than half of firms surveyed suggested they intend to pass on increased input costs through higher prices to customers for their wares. "These pricing plans reflect some improvements in demand as well as firms' desire to recover margins compressed by earlier cost increases," the survey said.

Roughly 50% of survey respondents expect inflation to hover between 2% and 3% over the next two years, and 41% predict inflation to remain above 3% over that same time frame. The central bank sets its policy rate to achieve and maintain 2% inflation. About a quarter of firms said it was "too hard to say" when inflation might return to 2%.

In a speech last month, Macklem said the central bank does not want to be "too slow to respond" to higher inflation should pressures become more persistent. The September inflation data, issued earlier Monday, indicated that core inflation--which strips out volatile items like food and energy--decelerated in the month, as did total inflation excluding gasoline.

The survey also suggested soft hiring intentions among firms, with 36% of firms expecting to increase their payrolls over the next 12 months. The majority of firms still report spare capacity, the central bank said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 19, 2026 13:08 ET (17:08 GMT)