On The Radar: What The Third Quarter Business Outlook Survey And The September Inflation Report Are Saying

  • First National Financial LP

Three takeaways

  1. Early this week on Monday, October 20, the Bank of Canada released its third quarter Business Outlook Survey. Sentiment improved a little, but outlooks and intentions remain subdued. 
  2. Tariffs and trade tensions are still lifting input costs, and many firms say “weak demand is limiting their ability to pass these cost increases through to their selling prices.” In parallel, Canada’s consumer price index rose to 2.4 percent year over year in September from 1.9 percent in August, with the Bank of Canada median measure of core inflation near 3.2 percent and the trimmed mean near 3.1 percent.
  3. That mix points to a cautious easing bias at the overnight rate, a gentle downward pull on five year mortgage benchmarks, and a more muted impact on ten year yields. 

What the survey shows

The survey was conducted from August 7 to September 3, with most interviews completed before the announcement about removing certain Canadian counter‑tariffs. The Bank’s summary is straightforward, firms’ outlooks and intentions remain subdued even as sentiment inches up. Sales expectations are soft, investment plans are restrained and most businesses do not plan to add staff. Capacity pressures look limited, with fewer companies reporting labour shortages and more saying they could handle an unexpected uptick in demand. One year ahead inflation expectations sit near 3 percent, and longer horizon expectations hover around 2 and a half percent. 

Inflation check 

September’s consumer price index increased to 2.4 percent year over year from 1.9 percent in August. Excluding gasoline, inflation was 2.6 percent. The Bank of Canada’s preferred core measures were steady to slightly higher, with the median measure about 3.2 percent and the trimmed mean about 3.1 percent. This combination of soft business sentiment and slightly firmer inflation keeps the near‑term policy discussion finely balanced ahead of the October 29 decision.

Margins, tariffs and pricing power

The strongest thread running through this edition is the pricing channel. Firms still expect input prices to rise faster over the next year than they did over the past year, while selling price growth is expected to be broadly stable. The Bank highlights that weakness in demand is limiting pass‑through today, which amounts to margin compression. The share of businesses that are planning for a recession has edged up, and uncertainty tied to trade policy continues to weigh on hiring and investment decisions. These details explain why sentiment can improve slightly without translating into stronger spending plans. 

What this implies for the overnight, five year and ten year rates

For the overnight rate, the combination of soft sales expectations, restrained hiring and investment, easing wage pressure and contained longer term inflation expectations supports a gradual easing bias. The drag from tariffs is visible in costs, but the survey underscores that price pass‑through is being checked by weak demand. As long as that balance holds, the policy path is more likely to drift lower than to re‑accelerate. The risk case is later in time, if demand stabilizes while tariffs stay in place, pass‑through could firm and slow the pace of cuts. 

For the five year yield that anchors many fixed mortgage rates, the survey tilts the near term toward modestly lower levels. Businesses report spare capacity, cautious investment and limited pricing power, all of which usually pull five year yields in the same direction as a careful easing cycle. If cost pressures begin to show through to selling prices in coming quarters, that would put a floor under the move lower, but the current survey does not show that shift yet. 

For the ten year benchmark, the influence is softer. The survey’s message of slack and anchored longer horizon inflation expectations argues against a sustained back‑up in long yields on domestic fundamentals alone. Ten year bond moves will remain sensitive to global growth and term premium, with the Business Outlook Survey providing only a gentle directional nudge. 

Bottom line

Early this week on Monday, the Business Outlook Survey delivered a slow‑growth, limited‑pricing‑power picture, and the September inflation report was firmer than August. That combination supports a cautious easing bias at the overnight rate while tempering how quickly five year and ten year yields might drift lower. If the margin squeeze gives way to broader pass‑through later, the floor under both policy expectations and fixed‑rate benchmarks will rise.

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