Bank of Canada Survey Shows Sharp Rise in Firms' Inflation Expectations

what happened

The Bank of Canada's quarterly business-outlook survey shows Canadian firms now expect inflation to reach 3.7% in the third quarter of 2027, up from a previous forecast of 3.2%. The central bank links the increase to higher energy prices tied to the Middle East conflict and to new tariffs on US and Canadian goods imposed after trade talks between Ottawa and Washington collapsed.

Consumers also expect higher inflation. Their five-year expectation rose to 3.91% from 3.39% in the previous quarter. More than half of surveyed firms plan to pass higher input costs on to customers. Governor Tiff Macklem said over the weekend he was concerned that energy costs could spread to other prices and that officials must consider whether rate hikes are needed. September consumer prices rose 3.1%, a softer pace than expected but still well above the 2% target.

why it matters

For markets, the signal matters because rising inflation expectations could tip the Bank of Canada toward a rate hike at its decision next week. That would support Canadian government bond yields and could strengthen the Canadian dollar, although the risk of further trade escalation with the US adds uncertainty.

market impact

Canadian dollar and government bonds: a tighter BoC policy outlook supports CAD and puts pressure on bond prices.

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