As we head into the latter half of January, thousands of small business owners and self-employed professionals will closely watch what actions the Bank of Canada (BoC) takes in the days and months ahead.

The Canadian central bank’s first interest rate decision and announcement of 2024 is hotly anticipated. Small business owners have been grappling with the impacts of inflation and higher interest rates set by the BoC to control it.

Although there are actions small businesses can take to try to reduce the influence of high inflation and higher interest rates, it’s the BoC’s decisions that have the most significant impact on the economy, business owners, and consumers.

How interest rates affect Canadian small businesses

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When Is the Bank of Canada’s Next Interest Rate Announcement?

The BoC makes eight interest rate announcements per year. The first interest rate announcement for 2024 is on January 24.

On January 15, the BoC released its Business Outlook Survey and the Canadian Survey of Consumer Expectations. These reports help guide the bank’s decisions and are updated and published four times a year. Future business outlook and consumer expectations reports will be issued on April 1, July 15, and October 11 this year.

The January Business Outlook Survey shows there were less favourable business conditions in the fourth quarter, with many businesses experiencing declines in their sales volumes. However, the report adds, on balance, businesses expect sales to stabilize over the next 12 months. Meanwhile, the Canadian Survey of Consumer Expectations for January shows consumers continuing to report feeling the negative impacts of high inflation and interest rates, and are cutting their spending in response. That cautiousness is expected to continue for many more months.

What Do Economists Expect the Bank of Canada to Do in January?

Economists’ predictions of what the BoC will do in the months ahead vary. Some expect the bank to begin trimming its interest rate in the second quarter (April to June); others think we won’t see a rate cut until the third quarter (July to September). At least there appears to be consensus among economists that rate cuts are forthcoming this year.

But caution is necessary. Although economists who monitor the central bank think it is done with hiking rates and expect the BoC will gradually cut its rate in 2024, only time will tell what the bank will do and when.

How Does the Bank of Canada’s Interest Rate Decisions Affect Small Businesses?

Canadian small business owners and self-employed professionals face three scenarios with each BoC interest rate announcement: a rate hike, no change to the current rate, or a rate cut. 

Here’s how each scenario may impact small businesses:

1. A Rate Hike

After keeping its benchmark or overnight lending interest rate at 0.25% for two years during the COVID-19 pandemic, the bank initiated its first hike to 0.50% in March 2022. It hiked its rate nine more times between April 2022 and July 2023. The BoC’s rate is 5% presently. 

Each time the BoC raises its rate, it affects small business owners in multiple ways, including:

  • Higher variable interest rates on loans, mortgages, leases, and lines of credit
  • Deters new investments and financing for expanding operations
  • Squelches consumer spending
  • Impacts foreign exchange rates
  • Ups supply chain costs for goods and materials
  • Leads to a general sense of economic uncertainty

But rate hikes can also have positive effects on business owners, such as:

  • Controls inflation and stabilizes prices
  • Strengthens the Canadian dollar, which can reduce the cost of imported materials
  • Incentivizes business owners to save rather than spend and possibly leads to increased capital available in financial markets for companies seeking investment
  • Promotes responsible financial management and discourages business owners from taking on debt for speculative purposes
  • Boosts investor and consumer confidence, positively impacting small businesses by creating a more stable and optimistic economic environment

2. No Change to the Current Interest Rate

Presently, the BoC’s benchmark interest rate is 5%. The bank’s rate decision in December 2023 marked the third consecutive time it opted to keep its key rate unchanged. However, BoC Governor Tiff Macklem warned at the time the central bank wasn’t ruling out future rate hikes. 

The current rate appears to be slowing the economy as it is designed to do. For example, Canada’s gross domestic product (GDP) report for the third quarter of 2023 (July to September) revealed our economy contracted by 1.1% on an annualized basis. In October, GDP was essentially unchanged for a third consecutive month. What the GDP report for the full fourth quarter of 2023 remains to be seen. Some economists think GDP will grow by 0.9% in 2024, but with negative growth in the first half of the year.

Regardless, many economists are forecasting the BoC will start cutting rates in early to mid-2024. But with inflation inching up to 3.4% in December from 3.1% – the bank prefers to see inflation closer to 2% – it may be overly optimistic to expect a rate cut early in the year. Since the bank started raising its benchmark rate, it succeeded in pushing inflation down from a peak of 8.1% in June 2022. 

If the BoC holds its key interest rate steady at 5% on January 24, it’s essentially the status quo for small businesses as they continue to absorb higher operational and supply costs, less consumer demand, and a weakening economy.

3. A Rate Cut

Two words that may be music to every small business owner’s ears: “Rate cut”. If the BoC decides to start cutting its interest rate from 5% on January 24, it can help inject momentum back into the economy and encourage consumers to spend.

That would be welcome news for small businesses. However, even when rate cuts commence gradually, business owners would do well to stay focused on reducing their debt, trimming operational costs, and fattening up their savings.  

Economic swings are unpredictable, and global economic conditions significantly influence the Canadian economy, including what unfolds in the U.S., our largest trading partner.

How Does Inflation Impact Business Insurance?

Inflation can have several impacts on business insurance, including:

Replacement Cost and Property Insurance

Inflation affects the replacement cost of commercial properties, including buildings, equipment, and contents. As the cost of materials and labour increases because of inflation, the replacement cost of insured assets also rises.

Increased Liability Claims

Inflation can lead to higher costs for medical care, legal services and settlements. It may result in increased liability claims, impacting liability insurance premiums for businesses because it can contribute to higher awards and lawsuit settlements.

Business Interruption Costs

High inflation affects business interruption expenses, such as costs for temporary facilities, labour, and materials during a restoration. Business interruption insurance premiums may be influenced by inflationary pressures, too.

Higher Costs for Rebuilding and Reconstruction

In the event of a covered loss, such as a fire or natural disaster, inflation can spike the costs of rebuilding or reconstruction of a property. Commercial property insurance may require a higher coverage limit to protect against increased rebuilding costs. A Zensurance broker can help you address that situation.

The Price of Commercial Auto Insurance

The cost of auto repairs and medical care following a collision are significant factors influencing commercial auto insurance premiums. Inflation can increase those costs.

Policy Limits and Deductibles

In response to high inflation, some insurance providers may reassess the coverage limits and deductibles of policies to ensure they adequately reflect the increased value of insured assets and potential claim costs.

Protecting Your Business Is Vital Especially in Challenging Economic Times

Business insurance provides financial protection in the face of uncertainties and liability risks.

From providing financial support against various types of losses, including property damage, liability claims, and business interruption, to providing stability and predictability, it allows businesses to focus on navigating economic challenges without the constant fear of financial devastation due to unexpected events.

Let us help protect your assets and strengthen your financial wellness. Fill out our online application whenever you want to receive a free quote. We’ll shop our partner network of over 50 insurance providers to get the low-cost protection you require and ensure you’re covered no matter which way the economy turns.

– Reviewed by Michael McDermott, Director of Underwriting, Zensurance.

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About the Author: Liam Lahey

Liam is the Content Marketing Manager at Zensurance. A writer and editor for more than 20 years, he has been published in several newspapers and magazines, including Yahoo! Canada Finance, Metroland Media, IT World Canada and others.