– The American makeover of Canada’s malls has sparked a price war so intense that Bank of Canada Governor Stephen Poloz says it’s dragging down inflation and may lead to lower interest rates.

Prices from peanut butter to televisions are tumbling as Wal-Mart Stores Inc. expands into the grocery aisles and Target Corp. offers fresh deals in an effort to rebound from a rocky Canadian debut, pressuring margins and shares of domestic rivals such as Loblaw Companies and Metro Inc.

“There’s still more room to lower the cost of living,” Shelley Broader, chief executive officer of Wal-Mart Canada, said in an interview in Toronto last week after announcing a $455 million expansion. “The more competition we get in, the more fired-up we get about achieving our strategy.”

With an economy already two years away from full capacity, according to the Bank of Canada, the retail rivalry helped push inflation to 0.9 percent on average last year, the slowest since 2009 when Canada’s economy was emerging from a recession. Bargains for shoppers mean more pain for retailers, according to Peter Sklar, analyst at BMO Capital Markets in Toronto.

Canadian grocers may experience a margin decline of 100 basis points over the next two years, Sklar forecast in a note to clients Wednesday. Shares of Loblaw, Canada’s biggest retailer, could decline 24 percent to $32 Canadian by the end of 2015, Metro could fall 30 percent to $44 and Empire Co. Ltd., owner of the Sobey’s chain, could drop 39 percent to $44, he said.

“With intense competitive industry activity expected to continue, an absence of food inflation, a strong U.S. dollar and a cautious consumer, the major Canadian incumbent grocery players will have a tough hill to climb,” said Sklar, who didn’t respond to requests for further comment.

Marie-Claude Bacon, a spokeswoman for Metro, and Andrew Walker, a spokesman for Empire, declined to comment on the BMO forecasts. Kevin Groh, a spokesman for Loblaw, didn’t respond to messages seeking comment.

Bentonville, Ark.-based Wal-Mart, which says it serves 1.2 million of the nation’s 35 million people each day, will boost its stores to 395 by the end of January 2015 from 389 and complete 35 supercenter projects, according to a Feb. 4 statement. Target, based in Minneapolis, opened 124 stores in Canada last year and plans to add nine this year.

Almost 3 percent of additional square footage has been added to the Canadian grocery industry over the past year, well in excess of Canada’s demographic growth rate, Sklar said.

Grocers aren’t the only ones heading north. U.S. clothing chains such as Express Inc., J.Crew Group Inc. and Ann Taylor have also crossed the border. Upscale retailer Nord­strom Inc. is planning to open the first of nine stores in Calgary this year and Saks Fifth Avenue is set to debut in Toronto in 2016.

Shoppers at Ottawa’s Train Yards mall could spend an afternoon without setting foot in a Canadian store. A Carter’s children’s clothing store, Wal-Mart, Marshalls, and Five Guys Burgers and Fries have opened.

“Every time a major U.S. retailer moves in, especially in the discount space, it sends shock waves through the system and we see Canadian retailers cutting prices in anticipation in a defensive move,” said Kenneth Wong, who teaches marketing at Queen’s University in Kingston, Ontario.

Canadian price declines over the past year include a 7.6 percent drop in macaroni and a 8.9 percent fall in peanut butter, according to Statistics Canada data compiled by Bloomberg. Prices for video equipment declined 6.9 percent in December from a year earlier while women’s clothing costs slid 3.9 percent, according to the agency’s last monthly report. The overall inflation rate was 1.2 percent in December.

About three-quarters of all the goods and services in the Bank of Canada’s core inflation basket rose by less than the bank’s 2 percent target over the past year, Tiff Macklem, senior deputy governor at the central bank said in a speech last week. “The weakness is widespread,” he said.

Chantelle Boyal has changed how she shops to find lower prices from American chains, taking a detour on the way back from work to the Wal-Mart at Toronto’s Dufferin Mall earlier this month.

“I have noticed an appreciable difference in prices since big American chains have come in,” said Boyal, eyeing George brand ladies’ pumps for $19 Canadian.

The retail wars are already weighing on Canadian companies’ earnings. Loblaw said Nov. 13 it expected operating income for 2013 to be flat compared with 2012 as it continues to invest in “food margins” in the fourth quarter. The company, whose shares have dropped 11 percent in six months through Wednesday, reports earnings on Feb. 20. Loblaw was little changed at $41.97 Canadian in Toronto on Thursday.

Lower prices contributed to a first-quarter profit decline and 0.5 percent drop in same-store sales at Metro amid “intense competition,” the Quebec-based supermarket chain said in a Jan. 28 earnings conference call. Metro shares have dropped 14 percent over the past six months while Stellarton, Nova Scotia-based Empire is down 15 percent.

Weak sales at Target’s Canadian outlets subtracted 29 cents a share from third-quarter profit, the company said Nov. 22. To clear out the extra inventory, the chain is lowering prices and perpetuating the price war with other retailers.

“Inventory continues to be a top priority for us as we build a historical database on which to base our forecasting and replenishment,” Lisa Gibson, a Target Canada spokeswoman, said by e-mail. “As we have said, opening 124 stores in less than a year with no historical data, all new team members and new systems is a major undertaking.”

Wong, the Queen’s University associate professor, doesn’t expect the price wars to let up.

“With Wal-Mart protecting what they have and Target coming in, you’re going to see the major Canadian chains embark on an even more aggressive price war,” he said. “I don’t see any end in sight.”