Borrowing costs

As borrowing costs rise, Canadian businesses seek to delay expansion plans

The moon rises behind the skyline and financial district in Toronto, November 25, 2015. REUTERS/Mark Blinch/File Photo

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TORONTO, July 19 (Reuters) – Some Canadian companies are reconsidering their expansion plans after the central bank’s surprise one-percentage-point hike in interest rates last week, and are instead focusing on protecting profits, according to analysts.

The shock of the sharp and sudden increase in borrowing costs comes as Canadian businesses are already grappling with tight labor markets and an uncertain demand outlook. Read more

The impact of rising costs could be felt most by small and medium-sized businesses that employ more than 80% of the workforce, according to Statistics Canada.

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“I’m not worried about whether Ford or General Electric can borrow money because they have money, but I’m worried about small and medium manufacturers who will now see an additional cost,” he said. said Dennis Darby, president of Canadian Manufacturers & Exporters. .

Historically low interest rates during the pandemic encouraged businesses to take on cheap debt, with non-mortgage borrowing by non-financial corporations in Canada rising 10% to C$817 billion ($639 billion) in first quarter of 2022 compared to a year ago, according to Statistics Canada. Real estate, construction and the oil and gas industry have become the most indebted sectors.

James White, vice-president of Wellmaster, an Ontario manufacturer of industrial hoses for the oil and gas industry, has suspended plans to invest in a sustainable equipment plant as the company transitions to an economy greener.

“We just have to wait,” White said.

Economists and industry groups say other small and medium-sized organizations are reassessing their business plans in the wake of the sharp rise in interest rates.

James Orlando, senior economist at TD Bank, said businesses are seeing these higher interest rates and determining the cost of further expansions or new capital investment. And they may need to reassess whether it will benefit them.

“Corporate bond yields and bank borrowing rates for businesses are all going up right now. It changes the arithmetic of whether a new project or investment will be profitable or not,” Orlando said.

($1 = 1.3032 Canadian dollars)

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Reporting by Divya Rajagopal; Editing by Aurora Ellis

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