How does a policy interest rate hike affect businesses?

17 June 2022 by National Bank
A woman wonders about the impact of the rate increases on her business

There have been several policy interest rate increases this year to counter inflation. But what’s the impact this could have on you and your business? Here are some answers that can shed some light on the issue.

What is the policy interest rate?

Bank of Canada’s policy interest rate (external link) serves to regulate the country’s economic activity, among other purposes.

Since financial institutions use the policy interest rate to set the interest rate on personal and commercial loans, it’s more expensive to borrow when the policy interest rate is high.

Find the financial strategy that best fits your business with our article6 sources of financing for businesses”.

How will my business be affected by policy interest rate increases?

If you’re financing your business, an increase in the policy interest rate will have an impact on the short-term and long-term borrowing costs.

Interest rates on variable-rate loans and lines of credit will increase. This means that your payments will also increase. Fixed-rate loans will only be affected when you renew.

A policy interest rate increase can impact:

  • Your ability to repay the financing you’ve already contracted.
  • Your company’s eligibility to obtain additional financing.

Discover the policy interest rate forecast in the coming months with our videoEconomic Impact - When will interest rates stabilize?”.

Want to learn more about the impact an increase can have on your personal finances? Read our articlePolicy interest rate hikes: how will they impact my finances?”.

What should I do if the interest rate on my loan increases?

It’s sometimes possible to transform all or part of your variable-rate loan into a fixed-rate loan. This will help protect you from future rate hikes. It’s important to keep in mind that fixed interest rates usually consider projected future increases. 

Don’t hesitate to discuss this with your business account manager or financial advisor. You can also seek advice and help from other specialists such as your accountant.

Good to know: the terms of financing products offered to businesses are often more rigid than loans offered to individuals. They also usually involve penalties when changing rates from variable to fixed rates.

How can I protect my business from inflation?

Raising the policy interest rate is one way for the Bank of Canada to try to counter inflation. That said, before the effects of its policy are felt, inflationary pressures drive up the prices of products and services (as measured by the Consumer Price Index (link to external site)).

The price of raw materials, labour, energy (ex: fuel) and certain equipment (ex: a fleet of trucks) is increasing. The availability of resources is also an issue. 

To learn more about inflation, watch our videoEconomic impact - The rise of inflation: a global phenomenon”.

To offset these increases, here are some helpful strategies:

Strategies to adapt to rising labour costs

Inflation directly impacts a company’s labour costs. They may also have trouble recruiting due to a labour shortage

In addition, the rise in labour costs can increase quicker than the selling prices of products and services. This is yet another pressure on your company’s profit margin.

Solutions

It’s vital for companies to efficiently manage their liquidity and ensure that their profit margins are protected. Be aware of the financial health of your business. Don’t wait until the end of your fiscal year to make a statement. 

For more tips, read our article "Business accounting: managing the finances of your SME".

Strategies to adapt to supply chain challenges

The geopolitical context also offers its share of challenges for companies operating internationally. Example: challenges in importing raw materials or exporting.

Rising transportation costs – including soaring container prices – and delivery delays are also adding to the overall effects felt by the pandemic in recent years.

Solutions

There are a lot of risks when it comes to relying on a single supplier. Try to sign agreements with multiple suppliers for the same product to protect yourself. Also, consider finding Canadian suppliers (or even in the same region or territory). This is a way to decrease the impact of a potential supply interruption.

Good to know: some solutions exist for financing your supply chain, such as invoice factoring.

To better understand the geopolitical climate, watch our videoEconomic Impact – Increased uncertainty due to the geopolitical climate".

In the presence of inflation and policy interest rate increases, be sure to analyze your business plans. You can then make informed decisions for your business. We’re here to help answer any questions you might have.

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