Governor Tiff Macklem on inflation in Canada

Governor Tiff Macklem on inflation in Canada

< Back to Articles | Topics: Positive business environment | Published: October 19, 2022

Canada’s inflation rate dropped to 7% in August, down from 8.1% in June, with core inflation running at about 5%. Despite what some were hoping are signals that Canada’s inflationary pressures are starting to ease, The Bank of Canada (BoC) made it clear that more interest rate hikes are necessary to bring core inflation down. In a speech hosted by the Halifax Chamber of Commerce on October 6th in Halifax, Governor Tiff Macklem made it clear that much of the decline in Canada’s inflation rate is from declining fuel and energy prices, and that the core metrics of inflation are still too high.

"We have yet to see clear evidence that underlying inflation has come down. When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted," he said.

The Governor cited multiple global factors which have all contributed to Canada’s rising inflation numbers, like the pandemic, the war in Europe, and supply chain issues. Macklem added that labor markets remain tight, and that due to the economy’s rapid recovery, the economy is in excess demand. For supply to catch up, the economy needs to cool down, which has led many economists to speculate about an impending recession in 2023.

Macklem later said whether the central bank can cool the economy enough to tame inflation without triggering a recession will depend, in part, on how sticky price increases are in Canada. The BoC has so far this year hiked its policy rate by 300 basis points to 3.25%, a 14-year high. The BoC’s next interest rate decision is scheduled for October 26th. Recently published U.S. data shows that U.S. inflation is at 40-year highs which has prompted the Federal Reserve to increase their rates in the U.S. This has led many to speculate that the BoC will likely raise the Canadian rate by another 100-125 basis points (4.0%-4.25%).

What do increased interest rates mean for your business?

Business Planning – Interest rates can affect business growth and planning for companies. Because most businesses need loans to purchase materials, equipment or other significant purchases, increased rates impact business’ ability to secure funding making future planning difficult.

Borrowing – Increased interest rates affect the prime rate, the rate at which banks lend money. If the interest rate increases, prime rates increase. When this occurs, lenders will increase credit card and loan rates making it more expensive for businesses to borrow the funds they need.

Low Consumer Spending - Similarly borrowing becomes more expensive for consumers. This means that their ability to buy products and services are reduced so businesses can suffer from a decrease in sales.

Decrease in Business Profits - As mentioned, consumer spending tends to decline and has a negative impact on sales, however operational costs like wages and materials can increase, all impacting a businesses bottom line.

Increased CAD – Relatively higher interest rates in Canada increases foreign investors’ demand for Canadian dollar-denominated securities, which can increase the value of the Canadian Dollar. For businesses that source their materials from foreign countries, this could mean lower prices on imports. Conversely, businesses that sell their products in foreign markets could receive less money from export sales.

How can businesses protect themselves from increased interest rates?

Spending Visibility - Use your own company’s data to your advantage. You want to show, in high detail, where your business’s money is going, how it’s going there, and why. This not only provides you with accountability throughout your organization’s entire spending chain, but also valuable data about your company’s cash flow.

Capital Structure – Rebalance portfolios and lock in today’s cost of capital in anticipation of interest rate variability. Explore other financing options that reduce risk and variability in debt payments that are affected by variable interest rates.

Eliminating Debt - The faster your business can eliminate short-term debt from your balance sheet and reduce future liabilities the better positioned you will be for future rate increases.

Supply Chain Disruptions – Build a diversified supply chain where possible, with enough maneuverability to address future uncertainty.

Hedging Strategies - Hedging is a risk management strategy that can help you offset the impact of higher interest rates. There are several different hedging strategies you can use, so it’s important to talk to an expert.

Link to Tiff Macklem’s speech in Halifax on October 6th, 2022

< Back to Articles | Topics: Positive business environment

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