Rising Interest Rates and Inflation Dampen Business Expansion, Reveals Bank of Canada Study

Rising Interest Rates and Inflation Dampen Business Expansion, Reveals Bank of Canada Study

In the recent survey conducted by the Bank of Canada, it was observed that despite anticipating a peak in interest rates, Canadian businesses faced a slowdown in their growth during the last quarter. This downturn is attributed to various factors, including the financial struggles of their customers and the dual impact of escalating interest rates and inflation.

The survey, released on January 15, sheds light on businesses’ challenges. Over one-third of the businesses surveyed reported a reduction in sales over the previous year. The survey highlighted that high-interest rates have adversely affected most companies, leading to a subdued sales forecast, limited investment plans, and a decline in hiring intentions.

Mortgage Renewals and Sector-Specific Challenges

A major concern highlighted in the survey is the impending wave of mortgage renewals, likely to further squeeze individuals’ disposable income. This squeeze is expected to have a ripple effect on spending and, consequently, on business growth.

The construction and real estate sectors have been particularly hard hit. Firms in these industries reported a significant slowdown, with some projects halted. This was mainly due to the high interest rates, which resulted in decreased demand and increased financing costs, coupled with soaring construction expenses and overall economic uncertainty.

A Glimmer of Hope for Future Growth

Despite these challenges, the survey reveals a sense of cautious optimism among businesses for 2024. Many firms anticipate an improvement in sales, contingent on the reduction of interest rates and stabilization of sales volumes after periods of decline or minimal growth.

There’s a prevailing belief, especially among businesses related to housing, that the effects of the recent monetary policy tightening will peak in the first half of 2024, with demand expected to surge later in the year. This optimism is underpinned by the expectation that interest rates will decrease over the upcoming year.

Source: https://financialpost.com/news/economy/interest-rates-inflation-slow-businesses-growth-bank-of-canada