Bank of Canada holds rates, now what? Three pieces of advice for your business

For Canadian business owners numb over recession talk, the Bank of Canada’s decision on Wednesday to hold its interest rate firm at 4.5% wasn’t necessarily a reason to order Champagne, but the announcement did, however, provide them with enough reason to pause chewing their fingernails long enough to assess the situation.

After all, the Bank’s decision to keep the overnight rate steady offers a slight reprieve from the squall of rate hikes that Canadians and business owners faced last year and into the first quarter of 2023. However, the decision to pause rate changes isn’t sufficient to calm concerns over the direction of the economy.

Although the rate of core inflation has relaxed to just under 5% in February, it is higher than it has been in decades. The Bank has not ruled out future rate hikes due to concerns over demand exceeding supply, labour shortages driving wage demands, and global economic influences. While we are all tired of hearing about it—businesses should be prepared for persistent high interest rates and a potential recession.

With the way forward as clear as mud, where are we now and what does this all mean for Canadian businesses?

Here is NATIONAL’s advice on addressing potential high interest rates or recessionary impacts:

Now is the time to reexamine your talent strategies.

Conducting a scenario analysis of your talent strategy should interest rates remain elevated is recommended to protect your balance sheet. So is finding ways to retain current talent.

According to a 2022 survey commissioned by Vancouver-based staffing group, Express Employment Professionals, 35% of Canadian companies say employee turnover has increased significantly since 2021. Meanwhile, a report from 2022 by U.S.-based HR-support company, Gusto, suggests that the cost of losing an employee can range between half and twice that employee’s yearly salary.

Organizations also lose knowledge, pay recruitment costs and accrued vacation time, and suffer productivity loss from an under-resourced team. The risk of losing talent in a tight job market where employees have the upper hand is too great.

When considering whether scaling back on hiring is feasible in preparation for a potential downturn, it’s important to review existing employee capacity and develop strategies for maximizing your staff’s performance during challenging circumstances. All while keeping your colleagues happy.

Canadian multinationals should plan for increased local economic risk over operating under one fiscal policy.

Companies with offices outside Canada would be wise not to work with a single fiscal policy and instead adjust investments, staff, and infrastructure differently depending on the unique risks specific to each country.

Interest rate increases across multiple developed economies have previously followed the Canadian pattern, although Canada is the first to hold interest rates while the EU seems to have a long way to go. For a company with global reach, inflation in the U.S. could potentially be stickier, and in the UK inflation rates are in the teeth grinding double digits.

For businesses with foreign affiliates, persistent high interest rates in host countries will lead to increased local risks that differ from similar risks here. The recent collapse of Silicon Valley Bank and Credit Suisse highlights the need for companies to prepare for the possibility of black swan events.

Questions to ask: are we well prepared in Canada? Are we under-prepared in Europe and elsewhere?

If you are considering a new foreign market, plan for interest-rate policies to diverge greatly between regions.

It’s easy to get excited about the market potential of a new region, but reviewing how your operations may be impacted if interest rate policies diverge greatly between countries is a recommended priority.

Despite interest rates in many developed countries increasing somewhat in tandem since the start of 2022, the same may not be true going forward. Given current unprecedented economic realities, it’s especially important to understand the long-term effect of entering a desired market from a fiscal standpoint in tandem with market research.

For example, if a company is considering investing in the UK for its market potential, it may make sense to turn to another nearby country in a smaller market given the level of inflation and interest rates in the UK. After all, there are other European countries with more stable inflation and less uncertainty.

Assess the trade-off between potential growth from entering a larger foreign market and local fiscal risk. This assessment is more important today than it has been in decades.

We’re not in the clear

On June 7th, the Bank of Canada will announce another decision on the key interest rate. NATIONAL’s pan-Canadian team will continue to monitor these developments.

Until then, remember that the more talk of a recession over a prolonged period, the less likely individuals and businesses are to prepare. For now, plan for challenges and keep the Champagne on ice.