According to economists, the recent interest rate cut by the Bank of Canada may not benefit small- and medium-sized businesses as presumed.<\/p>\n
With the new rate cut, the Canadian dollar also dropped in value and now has the potential to harm a significant number of businesses.<\/p>\n
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.<\/p>\n
\u201cMore small- and medium-sized businesses in Canada are importers than exporters,\u201d said Ted Mallett, chief economist at the Canadian Federation of Independent Business. \u201cAnd we\u2019ve already heard from some of them after the January cut that they\u2019ve had to pass the extra cost into their own prices domestically.\u201d<\/p>\n
Other businesses are taking a different approach in response to the absorbing of the costs.<\/p>\n
\u201cWe are basically riding it out right now,\u201d said Stan Lye, a director at Chemroy, a Brampton, Ontario-based importer of chemical, rubber, and organic products. \u201cWith the exchange rate going up, it\u2019s gotten very expensive to buy.\u201d<\/p>\n
While most importers are in pain about the recent rate cuts and the loonie dropping, some officials are taking a \u201cglass is half-full\u201d approach and gazing into the future. Stephen Poloz, the Bank of Canada\u2019s Governor, said that rate changes aren\u2019t 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.<\/p>\n
Overall, however, expectations have fallen short of the bank\u2019s hopes.<\/p>\n
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.<\/p>\n
\u201cWe haven\u2019t moved much against the euro,\u201d said Mike Holden, Director of Economic Policy at the Canadian Manufacturers & Exporters. \u201cIt\u2019s been harder to sell into Europe and more difficult to compete with European goods in the U.S. market.\u201d<\/p>\n
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.<\/p>\n
\u201cSo they have to swallow the higher input costs themselves without benefitting from the other end,\u201d Mr. Holden added.<\/p>\n
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.<\/p>\n
\u201cThe banks are diluting some of the potential impact that the Bank of Canada is trying to infuse into the economy,\u201d Mr. Mallett said.<\/p>\n
If business owners are to even think of launching expansions to grow, they\u2019re taking a \u201cwait and see\u201d approach first.<\/p>\n
\u201cBusinesses are looking for economic stability before they make decisions to expand or grow,\u201d Mr. Mallett said. \u201cIt all depends on expectations of the future, and right now there is a lot of uncertainty. There isn\u2019t going to be a rebound if companies don\u2019t see a sustained period of stability first.\u201d<\/p>\n
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