What does the recent Bank of Canada rate hike mean for your operation?
On January 17, the Bank of Canada (BoC) raised its key interest rate by 25 basis points and released their quarterly update on the economy. This is the third increase in the last seven months. This move reflects continued strength and confidence in the Canadian economy, a strong labour market, business investment growth and underlining inflation support.
Despite the economy’s strong performance recently, a few headwinds exist. The impact of a rising loonie were apparent when the trade deficit of Canada widened as merchandising imports grew in November. Inflation remains within the BoC’s target, despite inflationary pressures in labour costs and input prices reported by Canadian businesses. The BoC continues to identify NAFTA re-negotiations as a significant risk to the Canadian economy.
Patterns in interest rates are always important to monitor: Canadian household debt remains elevated relative to disposable income and rising interest rates bring borrowing costs for businesses looking to invest. Yet, the major impact across the entire agri-food supply chain is the one rates can have on the value of the Canadian dollar.
Higher interest rates support the value of the loonie
The spread between interest rates in Canada and the U.S. is really what currently drives the exchange rate value between the two currencies. Rates rising faster in Canada than the U.S. brings up the value of the Canadian dollar relative to the U.S. dollar. Generally speaking, operations at many levels of the agri-food supply chain benefit from a lower loonie.
The BoC rate is only one of the variables to monitor when it comes to trends in borrowing costs. Hence, do not focus solely on what the BoC does, but also pay attention to the overall macroeconomic environment. This will influence the bond markets which determine trends in short-term and long-term interest rates.
Which is better, fixed or variable rate loan?
There is no obvious right answer – it simply depends on each individual’s circumstances. Risk aversion, maturity of the business, financial strength are just a few of the factors to consider. Review your own situation and pick the financial strategy that’s best for your operation.
Leigh joined FCC in 2015 as a Senior Agricultural Economist, specializing in monitoring and analyzing FCC’s portfolio, industry health, and providing industry risk analysis. Prior to FCC, he worked in the policy branch of the Saskatchewan Ministry of Agriculture. He holds a Master of Agricultural Economics degree from the University of Saskatchewan.