Prepare for Higher Interest Rates: FCC Economist

The Bank of Canada may have surprised by holding its overnight lending rate steady in an announcement last month, but farmers may want to prepare now for the increase that is likely to come later, according to Farm Credit Canada chief economist JP Gervais.

Gervais said during a recent FCC webinar the first increase in the Bank of Canada’s overnight lending rate could come as soon as March and quite likely no later than April.

In a much-anticipated January rate announcement, the Bank of Canada shocked many analysts by holding its key overnight lending rate at 0.25%, even as the Canadian inflation rate surged to a 30-year high of 4.8% in December. However, the bank’s accompanying statement made it clear that rate increases are on the horizon as it aims to get inflation back down to its 2% target.

When it comes to inflation, Gervais confirmed interest rates are the No. 1 topic of discussion among farmers and agricultural businesses, adding that he believes producers need to begin looking at their loan exposures and consider how to best deal with the likelihood of higher rates.

He also warned that there is no rule the bank can only increase its policy rate 25 basis points at a time. The rate could jump by 50 points or more in a single announcement. Overall, some analysts have suggested the Canadian rate could increase by as much as 125 basis points or 1.25% before the end of 2022.

Given that Canadian farmers collectively owed about $121.8 billion at the end of 2020, an amount that has grown by about 6-7% annually over the past few years, even a small interest rate hike could have serious repercussions.

According to Statistics Canada, farmers paid almost $4.1 billion in interest in 2020.