Higher interest rates threaten to choke off investment spending by Canadian companies with one-third of businesses warning even a two per cent jump in borrowing costs would derail their growth plans and put their companies at risk, according to a new survey of mid-sized firms.
Companies in the consumer and retail space were most vulnerable, with 62 per cent responding their cash flows would come under pressure, while just 27 per cent of business leaders in the manufacturing sector shared that concern.
The Bank of Canada raised its policy interest rate by 0.25 per cent earlier this month to 0.5 per cent, its first rate increase since 2018. Many forecasters expect the rate hikes to continue, despite the uncertainty brought on by the war in Ukraine, since inflation has shown little sign of slowing. Economists at Scotiabank expect Canada’s policy rate to hit 2 per cent by the end of the year, rising to 2.5 per cent next year.
“You have this perfect storm brewing where historically companies weren’t facing such a level of chaos in the markets when rates increased.”
Given that even if rates increase by 100 basis points they would still be very low by historical standards it would seem that many companies have a business model which is unsustainable.