Demystifying the Economy | Are rising interest rates hurting companies?

Every Saturday, one of our journalists answers one of your questions about the economy, finance, markets, etc. in a group of experts.

Posted at 8:00 am

Delphine Belzile

Delphine Belzile
The press

Hi. I would be interested to know if interest rate hikes also affect companies and how? I can imagine that they also have to pay off mortgages and loans.

Jean Courchesne

The press asked Serge Coulombe, professor emeritus of economics at the University of Ottawa. Short answer: Yes, rising interest rates are shaking businesses in Canada.

This monetary policy is aimed at lowering borrowing costs, reducing the purchase of durable goods and preventing investment projects, explains the specialist. It’s a way to signal households, businesses and governments to “calm down” the economy, he adds.

Inflation reached 8.1% in June, the highest level since 1983. On July 13, the Bank of Canada raised its interest rate to 2.5% from 1.5%. This was the fourth rise since March. According to Serge Coulombe, raising interest rates is the central bank’s only tool to control price inflation.

Hafedh Bouakez, Associate Professor of Applied Economics at HEC Montréal, shares the same sentiment that monetary policy is intended as a strategy to encourage saving and contain demand to restore economic equilibrium. Then it becomes more difficult for companies to be successful in business when borrowing is more expensive.

a bad one timed coordination “For companies

In June, almost 70% of Canadian SMEs felt the rate hike affected them, said Simon Gaudreault, chief economist at the Canadian Federation of Independent Business (CFIB).

He acknowledges the need for a rate hike but believes the central bank’s decision is ill-timed for companies. About 62% of Canadian SMEs are struggling with pandemic debt, and 54% are still struggling with subpar incomes, according to the CFIB.

As interest rates rise, Canadian SMEs find themselves with fewer financial resources to compete in the marketplace, says Simon Gaudreault. According to him, governments must ensure that offset payments are made to minimize “the burden of COVID-19 debt.”

Canadian SMEs are forecasting average price growth of 4.7% to offset inflation, an all-time high, according to CFIB’s latest business barometer. “We can’t pass everything on to consumers,” says Simon Gaudreault.

For his part, Serge Coulombe claims that the rise in interest rates affects businesses as well as households and governments because “everyone needs to borrow”. Although monetary policy constrains companies’ business plans, “everyone will be happy if inflation comes down,” he concludes.

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