BOS Report Interpretation: Canada's Business Outlook Hits Lowest Level Since the Outbreak

　　Business sentiment has fallen to its lowest level since the global outbreak of Covid-19 and expectations for inflation remain high, according to a survey by the Bank of Canada.

　　In the second quarter Business Outlook Survey (BOS), the business outlook indicator fell to -2.2% from -1.1% in the previous quarter, mainly reflecting that more firms expect inflation to slow, hiring and investment intentions to weaken, credit conditions to generally tighten and capacity pressures to ease. At the same time, a growing number of firms believe it will take five years or more for inflation to fall to around 2%, while 30% expect inflation to average 3% to 10% over the next two years.

　　The survey also showed that while labor shortages remain widespread in some sectors, labor market pressures are easing due to reduced business demand and increased labor supply, in which case firms expect wage growth to slow.

　　In June, the Bank of Canada unexpectedly raised its policy rate by 25 basis points to 4.75 per cent, having already left rates unchanged at two consecutive meetings in March and April. The central bank noted that the move reflected their view that monetary policy was not being restrictive enough to bring supply and demand into balance and bring inflation back to its 2 percent target on a sustainable basis. And many economists expect another rate hike in the coming months.

　　"The slow decline in inflation expectations, coupled with a rebound in consumer confidence, suggests that the Bank of Canada has more work to do," said Royce Mendez, head of macro strategy at Desjardins Securities.