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In this edition of 5 Minutes for Business, Hendrik Brakel, our Senior Director, Economic, Financial and Tax Policy, looks at the effect low interest rates will have on Canadian business.

Last week, the Bank of Canada lowered the interest rate to 0.75%, a move that no economist had predicted. The big question is what does it mean for Canadian business? The immediate effect was to weaken the dollar, which fell to $0.81. As a result, investors will move out of Canadian securities towards the U.S., weakening the loonie even further. In terms of the actual cost of business loans, we are unlikely to see much change as banks will have to cover their costs of funds. We believe most banks will keep their prime rate at 3%.

Finally, last week’s rate cut speaks volumes about the Canadian economy. There has been a lot of speculation in the media that maybe lower oil prices could help keep Canada on balance if the negative impact on oil producers is offset by stronger manufacturing in Ontario and Quebec. The Bank clearly disagrees: Governor Poloz called low oil prices “unambiguously bad” for Canada. In fact, a lower loonie is good for some manufacturers, but the beneficial effects could take time to materialize, and consumers may not rush out and spend the money they save on gas.

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For more information, please contact Hendrik Brakel.

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