The Bank of Canada (BoC) today announced a cut to its key interest rate for the second time this year, and lowered its economic outlook for 2015 in recognition of Canada’s slowing economy.
The BoC lowered its overnight lending rate by a quarter percentage-point to 0.5%, with the corresponding bank rate at 0.75% and the deposit rate at 0.25%. Following the announcement, the Canadian dollar fell by more than a cent to a post-recession low of U.S.$77.33.
While the BoC is reacting to the macro-economic situation in Canada, the rate cut has implications for SMEs. This second cut will give small business owners more confidence to borrow with the objective of investing and innovating according to David Fabian, National Co-Leader of Ernest & Young’s Private Mid-Market Practice.
Here’s how the rate cut could affect your business.
Easier capital access
The rate cut makes it easier for small businesses to access capital says Steven Uster, CEO at FundThrough, a marketplace lender for small business loans.
That’s good because the Canadian economy is technically in recession. “The Bank of Canada is taking actions early to prevent a full blown recession so that small businesses don’t fade, as they will face the wrath of the recession harder than large companies,” says Uster.
Exporters win, importers lose
“Manufacturing and service exporters are going to do quite well with the lower dollar, as they’ll be far more competitive than the U.S.,” says Mike Moffatt, Assistant Professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business at Western University. “It helps exporters get more sales and increases their profit margins.”
On the flip side, a lower dollar makes importing machinery and equipment more expensive for small businesses that want to buy equipment from abroad.
Housing prices go up in Vancouver and Toronto
Moffatt says the Big Five banks might lower their interest rates (TD cut its interest rate by 10 basis points within minutes of the announcement) which may carry over to business lending. The lower interest rate is going to further boost housing prices in Vancouver and Toronto, and small businesses exposed to the real estate markets may feel the impacts of this.
Gas prices increase
The falling Canadian dollar pushes up the Canadian dollar-value of oil and gas, since oil is priced in US dollars. Businesses tied to shipping and transportation are going to have to pay for more expensive oil and gas from abroad, according to Moffatt.
Less foreign investment
“Because of the lower Canadian dollar, we might become a less attractive country to invest in by other countries,” says Fabian, who believes this could hurt small business down the road.
How will today’s rate cut affect your business plans? Share your thoughts using the comments section below.