While many Canadians took note of Bank of Canada Governor Mark Carney’s recent decision to hike interest rates 25 basis points to .50 percent (June 1, 2010), there’s no denying the fact that the country’s supply of exceptionally cheap money may be coming to an end. There’s no reason for panic, of course: the current .50 percent rate is still very low and will likely have minimal impact on mortgage affordability for the vast majority of Canadians looking to buy or refinance.
While Canada’s economy may be recovering faster than many countries in the G8, Carney’s cautious approach isn’t entirely surprising: the country can’t exist in its own economic bubble, and recent debt woes in Europe continue to be a concern. In addition, U.S. economic growth is recovering, but continues to be somewhat sluggish – an aggressive rate hike at this point could be an overly optimistic move that isn’t backed up by current inflation levels and other economic indicators like housing growth and unemployment rates. Carney’s decision to take a “wait and see” approach reflects the continuing volatility in the market, despite the fact that many growth indicators suggest Canada is firmly out of the recession. For example, Canada’s annualized economic growth rate based on January through March of 2010 is 6.1 percent – that robust growth alone is cause for optimism, but it’s also the type of number that helps to drive the case for more planned rate hikes.
Many are expecting that the deepening debt crisis abroad will continue to hold things in check, and that appears to be the case when looking at recent mortgage rate drops at Canada’s leading financial institutions. Several major lenders dropped their rates on fixed mortgages by approximately 10 basis points as recently as June 24th – not a huge reduction to be sure, but enough to suggest that there is a vested interest in protecting a strong available supply of cheap credit for consumers and business owners. With some forecasters expecting the economy to slow somewhat in the latter half of the year, this move could be a preemptive one designed to maintain strong activity in the housing and lending markets.
Where Do Rates Go From Here?
So where do interest rates go from here? While it’s anyone’s guess, many are anticipating a series of further 25 basis point hikes over the next 12 to 18 months – a move that would put the prime lending rate somewhere in the range of one to one-and-a-half percent by the middle of next year. Again, while this suggests a prevailing wave of economic optimism, it’s still highly speculative at this point. While that would significantly increase credit costs compared to the historic lows Canada has seen over the last three years, overall it’s a modest correction that would still preserve access to affordable money for consumers and business owners.
Small business owners should continue to pay attention to rate fluctuations and forecasts, while focusing on the following:
- Driving Down Debt – With interest rate hikes looking to be almost a sure thing, now might be a good time to focus on continued debt reductions. While this focus shouldn’t be entirely at the expense of investing in new business growth, managing debt load in a period of interest rate increases is vital for ongoing financial health.
- Taking a Second Look at Capital Expenditures – While economic growth is encouraging, a “wait and see” approach might pay off before taking on significant loans for items like new equipment. If the decision to finance large capital expenditures is a done deal, be sure that sales forecasts can justify the increase in credit costs.
- Looking at Outsourcing Solutions – Taking on additional hardware and software to manage internal systems like data back-up/recovery and customer management might not be the best choice in the current climate. Be sure to look at hosted alternatives that help to better control long-term fixed expenses. While these may not be a permanent solution or the most cost-effective in the long run, they can help see business owners through a period of economic uncertainty and keep cash flow strong.
When it comes to interest rates and the health of your small business, continued vigilance and modest optimism are the order of the day.