UPDATE: On Wednesday September 6th, the Bank of Canada raised its key interest rate again by another quarter of a percentage point, up to 1 per cent.
What does the interest rate hike mean to you?
If you follow the news you have heard by now that the Bank of Canada announced it is increasing the key overnight lending rate by 25 basis points to 0.75%. This is the first interest rate hike since 2010 and the first change of any kind since July 2015 when the rate was cut to 0.5%. Analysts are not surprised at the news since the Bank of Canada had been hinting in recent months that it was time. Canada is experiencing one of its strongest economic growth spurts since the 2008 – 2009 recession and is leading all other Group of Seven countries in pace of growth.
The strength of the Canadian economy is good news for business. The decision reflects the Bank of Canada’s confidence in the economy and its likely ability to grow above potential without fueling inflation. The central bank estimates the economy will return to full capacity by the end of 2017. Much of this growth has been fueled by household spending, which is great for retail businesses, but has seen household debt reach record levels leaving Canada vulnerable to a financial crisis.
For most established Rise CPA clients, the interest rate hike shouldn’t be of much concern. But for new businesses or those that have been struggling with cash flow or that have been reliant on any kind of funding, the cost of the rate hike could have an impact.
For example, if a company buys materials for a project in advance but doesn’t get paid until the job is completed, unless you have projected for it, the increased cost of interest will come straight off the bottom line. Even more concerning, StatsCan released data last year that showed that more than 80% of start-ups used personal financing to fund their new businesses. With another rate hike expected in October those who find themselves struggling with cash flow may find their anxiety levels rising.
While today’s announcement is good news for Canada’s economy and for the global economic outlook, that’s little comfort for those who could be negatively impacted by increased borrowing costs. Small business owners have enough stress without adding another reason to keep them up at night.
Although the rate hike is small and shouldn’t negatively impact most businesses, it provides a good opportunity for business owners to take a look at their business to see if it is prepared to weather greater changes down the road.
“Low interest rates have given many business owners a false sense of comfort,” says Rise Business Improvement Advisor Jon Caiger. “This is a good time to make sure that your business is running as efficiently as it can so you are prepared for any changes in the economy, no matter how big or small.”
If you have any questions about how interest rates or changes in the Canadian economy might impact your business, give us a call. Rise Advisors Business Improvement team can conduct a business diagnostic to flag any areas of weakness in advance and ensure that your business is growing on a solid foundation, no matter what the economic outlook.
Contact Rise Business Improvement team today 604-936-4377.
Bank of Canada raises interest rates for first time in 7 years – Globe and Mail
Top takeaways from Bank of Canada’s decision to hike rates – Financial Post
Why a Bank of Canada rate hike today would be felt around the world – Financial Post