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What an “interest rate freeze” means for business in Canada

What an “interest rate freeze” means for business in Canada
on January 30, 2024
Canada flag waving with stack of money coins macro

The Bank of Canada announced last week that they would be freezing interest rates at 5.00 percent—the fourth rate freeze in as many months—sending a mixed message to borrowers as inflation rates continue to give economists pause. 

This prolonged rate freeze comes after some of the most aggressive rate hikes in the central  bank’s history, which went from 0.25 percent at the start of the pandemic (when inflation was actually negative) to today’s 5.00 percent rate, which follow an inflation peak of 8 percent in June 2022. 

While the immediate takeaway for many will be positive—a worse-case scenario would’ve seen rate hikes—the realities of the situation are anything but clear cut. 

For many founders, this is especially true in the context of other economic factors, which have made outside fundraising a major challenge heading into 2024.

In this post, we’ll break down what the latest actions from the Bank of Canada mean for founders and the myriad conditions that are contributing to a challenging start to 2024.

Belt-tightening in Canada and across the world

To begin, it’s no secret that money is tight across the innovation economy, and Canadian businesses are no exception. 

For instance, much like their neighbors in the United States, Canadian founders saw a sharp decline in venture capital investment as 2023 came to a close, with Q3 marking the country’s slowest period for deal volume since the start of the pandemic, according to reports.

To that end, the dollar value of investments dropped 60 percent from Q2 to Q3 in Canada, mirroring the sharp downward trajectory of VC activity tracked by Pitchbook as 2023 came to a close. 

While these trends may appear worrisome on their own, they’re just one of several signals that 2024 is going to be tough for fundraising.

Perhaps the biggest “canary in the coal mine” for business leaders across Canada hasn’t been VC attitudes, but interest rates.

Interest rates skyrocketed in response to inflation highs in 2022

Over the past two years, the Bank of Canada has embarked on some of the fastest rate hikes in the country’s history. 

Officials at Canada’s central bank had kept interest rates at 0.25 percent throughout 2020 and 2021 to help stave against pandemic instability. Then in March 2022, with oil and commodity prices (alongside geopolitical instability) pushing inflation up, the Bank of Canada raised interest rates to 0.50 percent. 

From there, things started moving fast.

First, the bank pushed a 50-basis-point raise in interest on April 13, 2022, delivering a 1.00 percent lending rate to signal quantitative tightening—that is, a reduction in available cash within financial markets. 

On June 1, 2022, an additional hike brought the lending rate to 1.50 percent as Canadian inflation exceeded 8 percent

Over the next year-plus, the interest rate would continue to jump in fits-and-starts to chip away at inflation, before the Bank of Canada’s policy rate reached a 5.00 percent highwater mark in July 2023

To put a finer point on it: In roughly 2 years, interest rates went from almost zero to 5.00 percent, rapidly accelerating the total cost of a loan—and adding another dimension to the challenges of fundraising for founders. 

The good news?

From a broader economic perspective, inflation has dropped significantly alongside the Bank of Canada’s interest rate hikes, with the policy rate actually matching the state of inflation at roughly 4.50 percent as of March 2023. 

As inflation rates continued to drop, however, the Bank didn’t let up, eventually hiking interest to a 5.00 percent rate in July 2023.

From there, the bank has held firm, avoiding rising interest rates as inflation continued to ebb and flow—though at rates between 3 and 4 percent, which is far healthier than the 8 percent highs reached in June 2022. 

As of December 2023, the inflation rate was down to just 3.4 percent, which shows that things are still generally trending in a positive direction from an inflationary perspective as we head into January. 

The (potentially) bad news?

As of January 24, 2024, the Bank of Canada has committed to leaving interest rates at 5.00 percent, marking the fourth consecutive “rate hold” and a sign that inflation rates are far from where they should be.

“First, monetary policy is working to relieve price pressures, and we need to stay the course. Inflation is coming down as higher interest rates restrain demand in the economy. But inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work,” said Tiff Macken, Bank of Canada Governor, in a statement last week. 

So despite inflation and interest rate hikes finally appearing to level out after riding a rollercoaster over the past two years, conditions are a far cry from the “salad days” of 2020, when both lending and VC activity seemed unstoppable. 

The TL:DR? Loans remain pricey, despite optimism

How can founders navigate the dual phenomenon of high interest rates alongside a markedly muted VC environment when looking to fund their innovation?

While there’s no silver bullet—and every startup’s funding journey will be contingent on how truly innovative their solutions are—it’s critical for founders to tap into non-dilutive avenues for funding at every stop to stretch the dollars they do have further. 

For many founders, this means investing more than ever in research and development to create solutions that address acute needs, drive efficiencies and carve out a niche in their market.

Although this will call for more investment into R&D—something that pre-revenue founders may be apprehensive about—there are strategies that founders can follow to stretch those R&D investments further while actually recouping a portion of their spend as a tax credit. 

Across North America, Boast helps startups and founders optimize their R&D workflows to tap into a wealth of non-dilutive funding sources that enables them to double down on their product roadmap while actually extending their runway. 

Book a call with our team today to learn how Boast can boost your capital strategy, and download our ebook to get a better understanding of the funding options available at your various stages of growth.

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