Bank of Canada: Geopolitical risks surpass trade tensions as top threat

A quarterly survey published by the Bank of Canada (BoC) found that business and financial leaders now rank geopolitical risks above trade tensions as the principal threat to the Canadian economy. The main round of the survey was conducted before the outbreak of the Iran war, and the BoC undertook a smaller follow-up in March to assess direct effects on exposed firms.

The core survey interviewed 100 firms between February 5 and 25; after the conflict began on February 28 the Bank carried out an additional March survey of 20 firms it judged likely to be directly affected. Respondents reported upward revisions to expected input prices, specifically citing fuel, freight, fertilizers and exchange-rate moves. The business outlook indicator rose to -0.36, its strongest reading since the fourth quarter of 2022.

Rises in input costs have already been reported by fuel-intensive sectors such as agriculture, oil and gas, manufacturing and transportation, while other firms anticipate cost pass-throughs from suppliers in coming months. Money markets are pricing in one 25-basis-point rate hike later in the year, and BoC Governor Tiff Macklem said he was not concerned about a near-term spike in inflation expectations stemming from the war. These signals matter for both inflation dynamics and the monetary policy outlook.

The survey also noted that trade frictions with the United States, which had been amplified by tariff threats, are weighing less heavily on firms’ assessments and that future sales expectations have reverted to historical averages. More companies reported shifting investment toward productivity and capacity expansion rather than routine maintenance, and nearly half expected to add staff over the next 12 months.

Market participants say the near-term policy path will hinge on whether energy-driven price pressures prove temporary or persistent. If oil and related input costs sustain upward pressure on inflation, the BoC could respond with further tightening; if those pressures ease, the central bank may hold a more neutral stance. The survey’s hiring and investment intentions nonetheless suggest underlying resilience in corporate activity.