Are you seizing the opportunity that our current low interest rates offer Canadian small business owners? With interest rates holding steady and energy prices rising, RBC’s latest Quarterly Economic Forecast predicts that Canada’s economy is poised to grow at a higher-than-average pace through the end of 2016 and into 2017. This means there are several ways your small business could use the current economic condition to your advantage.
Quarterly Economic Forecast
When interest rates change it’s headline news in Canada, but Quarterly Economic Forecasts discuss longer-term predictions for interest rates. Refer to current forecasts to guide your financial business decisions such as when to borrow money, expand your business or invest.
In the most recent forecast, experts predicted the Bank of Canada wouldn’t change the overnight lending rate through the end of 2016 and beyond. So far, they’ve been right, with the Bank of Canada announcing the rate would remain steady at 0.5 percent.1
This combination of steady low interest rates, a strong labour market, and the introduction of the federal child care benefit points to growth opportunities for small businesses, because it puts money in Canadian consumers’ pockets, and they’ll be ready to spend.2
Though interest rate changes in the US may not directly impact Canadian small business owners, they do have an indirect impact on your business’ purchasing power if a rising rate causes the Canadian dollar to fall. This raises the costs of importing goods and supplies from the United States or other places with goods valued in the US dollar. RBC experts predict that the US Federal Reserve will likely be the first central bank to raise their rate.2
Inflation Rate Expected to Increase Slightly
Inflation is a general increase in prices and fall in the purchase value of money, and the Bank of Canada sets a “target inflation rate” of 2 percent as a healthy rate to help grow the economy.3 Currently, inflation rates remain below 2 percent, weighed down by low energy costs. However RBC’s September forecast predicts that the oil-price recovery that started in February 2016 will continue a slow climb as oil demand and supply moves toward a balance. Don’t be surprised to see this influence an inflation increase in early 2017 to slightly over 2 percent in Canada and the US, says the report.
Rising inflation in Canada means your Canadian-bought supplies will cost more. So if you’re considering making some big purchases for your business in the near future, you may want to stock up now before inflation starts creeping up.
An increase in the inflation rate, driven by rising oil prices, may curb the Bank of Canada’s decision to further reduce interest rates, because lower rates encourage more borrowing and spending which could lead to a higher-than-desirable inflation rate.4
When inflation does start to rise, as a business owner you may choose to increase your prices along with the general price increases in the Canadian economy to reflect your higher future supply costs.
Use Low Interest Rates to Finance Capital Expenditures
If you’re planning a major business renovation or expansion in the near future, think about taking advantage of the current low interest rates for financing your renovation or business expansions; however, watch out for maxing out your available credit, as you don’t want to be stuck without available funds for an emergency if you can’t qualify for additional credit when rates go back up.5
Also consider your future cash flow in a higher rate environment, and your ability to pay off the funds you borrowed when rates were low.
Refinance Your Business Loans or Credit Lines to a Lower Rate
If your current business loan or credit line was arranged when rates were higher, now could be a good time to refinance to a lower rate to save on interest, and it may even give you the opportunity to increase your loan or limit.
If you do increase your business borrowing to take advantage of the lower interest environment, don’t borrow more than you can comfortably afford to pay back. Over-extending yourself when credit is cheap could lead to difficulty making payments when rates rise down the road, and result in higher rates on loan renewals or climbing rates on credit lines based on increasing prime rate.
While Canadians have enjoyed (or suffered through) sluggish inflation and low interest rates for several years, change may be in the wind. Sign up for RBC Quarterly Economic Updates to keep up with expert forecasts on future economic changes in Canada and around the world, and to learn how coming changes may impact your own finances and business.
1. CBC News (October 19, 2016) – Bank of Canada holds key interest rate at 0.5%
2. RBC Economics Research (September 2016) – Economic and Financial Market Outlook – September 2016
3. Reuters Canada (October 24, 2016) – Bank of Canada renews inflation target, adjusts how it gauges inflation
4. MoneySense (March 9, 2016) – Do BoC rates impact you? 10 questions answered
5. Canadian Business (April 20, 2016) – Why not borrow heavily when interest rates are so low? Here’s why
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.