Posted at 8:00 a.m.
Hello. I would like to know if interest rate hikes will also affect companies, and how? I imagine they also have mortgages and loans to pay off.
Jean Courchesne
The Press asked Serge Coulombe, professor emeritus of economics at the University of Ottawa. Short answer: yes, rising interest rates are rocking businesses in Canada.
This monetary policy aims to tighten borrowing costs, reduce purchases of durable goods and discourage investment projects, explains the specialist. This is a way to signal to households, businesses and governments to “calm” the economy, he adds.
Inflation reached 8.1% in June, its highest level since 1983. On July 13, the Bank of Canada raised its key rate from 1.5% to 2.5%. This was the fourth increase since March. According to Serge Coulombe, increasing the key rate is the only tool the central bank has to control price inflation.
In the same opinion, Hafedh Bouakez, full professor of applied economics at HEC Montréal, tells us that monetary policy is intended as a strategy to favor savings and curb demand in order to regain an economic balance. It then becomes more difficult for companies to prosper in business when borrowing costs more.
A bad timing ” for companies
In June, nearly 70% of Canadian SMEs felt they were affected by the rise in interest rates, said Simon Gaudreault, chief economist of the Canadian Federation of Independent Business (CFIB).
He acknowledges the need to raise interest rates, but believes the central bank’s decision does not come at the right time for businesses. Some 62% of Canadian SMEs are struggling with pandemic debt and 54% are still dealing with below-normal incomes, indicates the CFIB.
When interest rates rise, Canadian SMEs find themselves with fewer financial resources to remain competitive in the market, says Simon Gaudreault. According to him, governments will have to make sure to compensate to minimize “the burden of the COVID-19 debt”.
Canadian SMEs are forecasting average price growth of 4.7% to offset inflation, according to CFIB’s latest business barometer, an all-time high. “We can’t pass everything on to consumers,” says Simon Gaudreault.
For his part, Serge Coulombe maintains that the rise in interest rates affects companies as much as households and governments, because “everyone needs to borrow”. Although monetary policy restricts corporate business plans, “if inflation ends up going down, everyone will be happy,” he concludes.
Consult our section “Demystifying the economy”