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Worth notingMarket eventWed, Oct 282 min read
Higher borrowing costs can squeeze Canadian spending and investment, reaching US companies that sell into the country.
On October 28, the Bank of Canada raised its overnight rate target by 25 basis points, or 0.25 percentage point, to 2.5%. The rate guides the cost of overnight borrowing between banks; this was Canada's first increase since July 2023.[1]
The central bank cited higher and more persistent inflation driven by energy prices.[2] Coverage described the increase as expected.[3]
A higher policy rate feeds into floating-rate loans and new borrowing, increasing household payments and raising the return businesses need to justify investment. With energy costs already squeezing purchasing power, more expensive credit can further restrain demand for homes, cars and other large purchases. That is the main route from this inflation response to company revenue.[2]
Canadian bond yields rose that day, with the two-year yield reaching a two-year high, while the Canadian dollar edged higher against the US dollar. Higher bond yields can raise the cost of replacing maturing corporate debt; a stronger Canadian dollar helps Canadian businesses buying in US dollars but pressures exporters with Canadian-dollar costs and US-dollar receipts.[4] US Treasury yields also shifted: the two-year fell from 4.70% in the preceding session to 4.67%, while the ten-year rose from 4.99% to 5.05%, providing the backdrop for US companies' own financing costs.
Homebuyers and consumers relying on loans face higher financing costs and may postpone purchases. Homebuilders, auto sellers and durable-goods retailers, including US suppliers to Canada, could face weaker demand.[1][2]
Banks can collect more interest as some loans reprice, but deposit and other funding costs may also rise. Greater borrower stress and slower loan demand can offset gains, leaving the net effect dependent on repricing speeds and customers' ability to repay.[1]
If the Canadian dollar stays stronger, Canadian importers pay less for US-dollar goods, and US companies' Canadian sales translate into more dollars. Canadian exporters may lose competitiveness, while higher local borrowing costs could weaken orders for US suppliers.[1][4]