Canadian SME's will want to pay close attention to today's announcement made by the BoC as they raised the lending rate by an additional 50 basis points.
Using dovish statements such as,
“GDP growth in the third quarter was stronger than expected…”,
“…price pressures may be losing momentum…”
“Governing Council will be considering whether the policy interest rate needs to rise further…”
The BoC has sent a strong signal to Canadian businesses that:
1) We Are Near The Maximum Terminal Interest Rate
Today's announcement is a departure from the BoC's previous hawkish statements made back in October.
The key word is "considering" which signals a passive role.
2) It Is Unlikely That Lending Rates Will Go Back To 3% Anytime Soon
There is no indication the 3% lending rates we have enjoyed for the previous 10 years will return anytime soon. The graph above suggests a near improbable set of circumstances could get us back to 3% as quickly as we got up to 6.5%.
In fact, the "sticky inflation" terminology used by the BoC is a strong indicator that high interest rates are here to stay through 2023 and heading into 2024.
The bottom line is that companies waiting on the sidelines in the hopes of accessing debt at pre-2022 levels are likely to be disappointed—and possibly left behind.
On the flip-side, now could be one of the best times in history for SME's with strong balance sheets to renegotiate debt-covenants and access better financing terms.
With a disappointing Q4 last week, Commercial Banks are now looking to increase their commercial lending portfolios—their only profitable revenue line.
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Matthew is president of PubCo Finance Solutions — A Division of PubCo Reporting Solutions, Inc . He has 15 years of progressive accounting experience as a CFO, and 10 years working in commercial banking for TD Securites, CIBC World Markets, and the EDC. If your company needs help with access to better financing, please feel free reach out to Matthew here.
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