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According to economists, the recent interest rate cut by the Bank of Canada may not benefit small- and medium-sized businesses as presumed.
With the new rate cut, the Canadian dollar also dropped in value and now has the potential to harm a significant number of businesses.
When the rate was cut by 25 basis points to 0.5 %, the loonie also dropped more than one cent. This is a six-year low and in American dollars translates to 77.40 cents. This rate cut by the Bank of Canada was not the first cut of its kind in 2015. Just in January, the BofC had a rate cut, and the loonie dropped as a result in this case, too.
“More small- and medium-sized businesses in Canada are importers than exporters,” said Ted Mallett, chief economist at the Canadian Federation of Independent Business. “And we’ve already heard from some of them after the January cut that they’ve had to pass the extra cost into their own prices domestically.”
Other businesses are taking a different approach in response to the absorbing of the costs.
“We are basically riding it out right now,” said Stan Lye, a director at Chemroy, a Brampton, Ontario-based importer of chemical, rubber, and organic products. “With the exchange rate going up, it’s gotten very expensive to buy.”
While most importers are in pain about the recent rate cuts and the loonie dropping, some officials are taking a “glass is half-full” approach and gazing into the future. Stephen Poloz, the Bank of Canada’s Governor, said that rate changes aren’t necessarily supposed to move the Canadian dollar one way or another, but he is hopeful that since the loonie is down right now, foreign buyers will see this as an opportunity to stock up on Canadian goods, stimulating the Canadian economy.
Overall, however, expectations have fallen short of the bank’s hopes.
Economists say that a lot is riding on the United States to buy more Canadian goods and show a stronger demand. In addition, the loonie, already talked about along the same lines as the American dollar, also needs to be compared to other currency, even the euro.
“We haven’t moved much against the euro,” said Mike Holden, Director of Economic Policy at the Canadian Manufacturers & Exporters. “It’s been harder to sell into Europe and more difficult to compete with European goods in the U.S. market.”
In addition, Mr. Holden said that more than half of Canadian exporters serve as importers, too. And profits from possible export sales could be whittled away by increased import costs. Furthermore, some exporters are bonded to long-term contracts, but if push comes to shove, buy their inputs when they need to.
“So they have to swallow the higher input costs themselves without benefitting from the other end,” Mr. Holden added.
Mr. Mallett states that small business can still benefit in some way. Even though the Bank of Canada has cut its rates, and the loonie has dropped in value, these companies can still benefit from the reduced borrowing costs. However, any gains will be on a small scale. When the basis points were cut, Canadian banks also reduced lending rates 15 basis points.
“The banks are diluting some of the potential impact that the Bank of Canada is trying to infuse into the economy,” Mr. Mallett said.
If business owners are to even think of launching expansions to grow, they’re taking a “wait and see” approach first.
“Businesses are looking for economic stability before they make decisions to expand or grow,” Mr. Mallett said. “It all depends on expectations of the future, and right now there is a lot of uncertainty. There isn’t going to be a rebound if companies don’t see a sustained period of stability first.”