Canadian business outlook deteriorates after trade talks collapse, Bank of Canada survey finds

Bank of Canada surveys published October 19, 2026, reveal deteriorating business sentiment following the August 21 breakdown of Canada-U.S. trade talks. High input costs, new tariffs, and Middle East conflict have pushed short-term consumer inflation expectations to 4.03%. In response to hawkish remarks by Governor Tiff Macklem, financial markets and major bank economists now price in a 75% probability of a 25 basis point rate hike on October 28.

Business sentiment and trade negotiations

• ▪A Bank of Canada survey of approximately 340 business leaders in September 2026 found that Canadian business sentiment deteriorated after trade talks with the U.S. broke down on August 21, 2026.
• ▪The collapse of Canada-U.S. trade negotiations on August 21, 2026, was followed by a 50% U.S. tariff on approximately $28 billion of Canadian goods and planned Canadian retaliatory counter-tariffs.
• ▪The Bank of Canada reported that despite post-talk deterioration, business sentiment and expectations remained considerably stronger than during the peak of trade tensions in 2025.
• ▪Special Bank of Canada consultations in July and August 2026 found Canadian firms adapting to trade tensions by modifying supply chains, increasing technology spending, and diversifying export markets.
• ▪The Bank of Canada's Business Outlook Survey indicator of prospects under current economic conditions rose slightly to -0.33 in the third quarter of 2026 from -0.38 in the prior quarter.

Inflation expectations and price pressures

• ▪Bank of Canada surveys released on October 19, 2026, showed rising inflation expectations driven by trade tensions, input costs, tariffs, and Middle East conflict pressures on energy.
• ▪Bank of Canada Governor Tiff Macklem stated on October 17, 2026, that the central bank expects to revise its inflation forecast higher due to persistent Middle East conflict and elevated oil prices.
• ▪Approximately half of Canadian firms surveyed by the Bank of Canada plan to pass on cost increases from the Iran war and trade tariffs to customers over the next 12 months.
• ▪Statistics Canada reported that Canada's annual headline inflation rate rose to 3.1% in September 2026 from 3.0% in August, driven primarily by higher gasoline and diesel fuel prices.
• ▪The Bank of Canada's Canadian Survey of Consumer Expectations showed surveyed consumers expect inflation to average 4.03% over the next year, with over 50% anticipating a recession within 12 months.

Interest rate hike expectations

• ▪Following Bank of Canada survey releases and Governor Tiff Macklem's comments, money market swaps implied a 75% probability of a 25 basis point rate hike at the October 28, 2026 policy decision.
• ▪The Bank of Canada's key lending rate was 2.25% as of October 19, 2026, having remained unchanged since its last rate cut in October 2025.
• ▪Economists at Scotiabank, Desjardins Securities, and Bank of Montreal revised their policy forecasts on October 19, 2026, to predict a 25 basis point Bank of Canada interest rate hike in October.

Financial market reaction

• ▪The S&P/TSX Composite Index fell 247.92 points, or 0.7%, to end at 35,928.63 on October 19, 2026, led by declines in rate-sensitive utilities and real estate sectors.
• ▪Canada's 5-year bond yield increased 14 basis points on October 19, 2026, returning to its level from the beginning of October 2026.
• ▪The Canadian dollar rose nearly one-third of a U.S. cent on October 19, 2026, despite simultaneous modest gains in the U.S. dollar against other major currencies.
• ▪On October 19, 2026, Canada's 2-year bond yield rose 14 basis points amid market expectations of an imminent Bank of Canada policy rate increase.