The latest Business Outlook Survey reveals a drop in business sentiment due to US tariffs, with the survey index falling to minus 2.14 in the first quarter from a revised minus 1.16 in the fourth quarter (previously minus 1.18) and from minus 2.35 in the year ago first quarter.

Firms are delaying investment decisions and hiring until the economic outlook becomes clearer. Fewer businesses than last quarter expect sales growth to improve over the coming year. Hiring plans are much weaker and expectations for inflation have risen. Firms expect the inflationary effects of tariffs to outweigh reduced inflation pressures linked to weakening demand. Expectations for declining input prices have shifted to expected increases, and firms say they would raise their own prices in response.

The Bank of Canada's (BoC) publishes a quarterly Business Outlook Survey based on a summary of interviews conducted by the Bank's regional offices with the senior management of about 100 firms, selected in accordance with the composition of Canada's gross domestic product (GDP). The survey's purpose is to gather the perspectives of these businesses on topics of interest to the central bank (such as demand and capacity utilisation) and their forward-looking views on economic activity. Since the BoC is charged with keeping inflation within a specified target range, information on price pressures is watched particularly closely.

The outlook survey is used to evaluate economic conditions prior to four Board meetings a year where the BoC sets interest rate policy. Although monetary policy is announced eight times a year, these reports are available only on a quarterly basis. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the survey portrays an overheating economy or inflationary pressures, the Bank of Canada may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the survey portrays economic difficulties or recessionary conditions, the Bank of Canada may see the need to lower interest rates in order to stimulate activity.