WIKIFX REPORT: BOC: SHORT-TERM INFLATION EXPECTATIONS HAVE EDGED DOWN BUT REMAIN ELEVATED

• Bank of Survey.

• Business confidence has softened but is still positive.

• Short-term inflation expectations edged down but remain elevated.

The Bank of Canada (BoC) released on Monday the Business Outlook Survey for the third quarter of 2022. The report says that “business confidence has softened”, “many firms expect slower sales growth as interest rates rise and demand growth shifts closer to pre-pandemic levels” and regarding inflation, it states there are early signs “that pressures on prices and wages have started to ease, but firms inflation expectations remain high.”

KEY TAKEAWAYS:

• “Businesses expect their price increases to moderate due to downward pressure on prices for commodities and other input goods. They also expect their wage increases to soften from high levels. Firms‘ short-term inflation expectations remain above the Bank of Canada’s inflation target.”

• Firms expectations for long-term inflation are much closer to target and have been stable for the past few quarters. Most businesses that expect inflation to be substantially above 2% anticipate that it will return to target within three years.

• “Firms‘ sales outlooks have softened. Businesses with sales linked to housing activity and household consumption expect weaker sales growth due to rising interest rates. Other firms anticipate their sales growth will be healthy but slower than earlier in the economic recovery from the COVID 19 pandemic. Amid emerging signs of moderating growth in demand, firms’ plans to invest more and hire eased slightly from previously high levels.”

• “Most BLP respondents think the probability of a recession in Canada in the next 12 months is at least 50%. While many firms anticipate a recession, those not linked to housing activity and other household consumption do not expect it to have a large impact on demand for their products or services. When asked what would trigger a recession, business leaders indicated that large increases in interest rates and high prices reducing consumption would be the most likely factors.”

Market reaction

The USD/CAD remained near daily lows after the release hovering around 1.3740, weakened by a broad-based slide of the US dollar.