Author: Peter Cantelon, Executive Director
For the past several years Canada has been enjoying some very low interest rates.
For the most part this has been a good thing but this depends on who you are. If you are looking to purchase a house, a car or take out a personal loan than the interest rates keep your monthly payments down and hopefully in a manageable place.
Low interest rates are also helpful if you are an organization implementing large capital projects like renovations, or new facility construction because even if the price of materials rises, as it has lately with ongoing COVID-19 related supply chain issues, you can at least benefit from reduced debt servicing.
Believe it or not Canada has not always been in this place of low interest rates. In 1991 rates were running as high as 14 percent. In fact in 1981 the Bank of Canada interest rate went to an historic high of 20.75 percent.
Currently the rate is at an all-time low of 0.5 percent and holding although it is forecast to rise soon in an effort to combat inflation.
The primary rationale behind how the Bank of Canada sets interest rates is inflation. The BoC seeks to manage annual inflation to between 1-3 percent. When inflation is driven higher as a result of prices increasing due to higher production costs or limited supply.
By increasing the interest rate the goal is to reduce demand, increase supply and thus bring down prices.
Of course the economy is complex and if inflation is being driven by other factors such as reduced ability to create product based on limited workforce (like a COVID-19 driven reduction in factory capacity) increasing interest rates may not have the desired effect.
So how does all of this affect the average non-profit? Well it depends a little on the non-profit. Generally speaking non-profits like to keep their costs down due to somewhat unpredictable income related to a dependence on government funding and grants.
A run of low interest rates generally reflects a stable economy with manageable inflation meaning a non-profit and individuals should be able to plan appropriately and navigate those costs.
On the flipside, non-profits like The Winnipeg Foundation, Jubilee Fund and others that often invest donations and/or have investment options like our Jubilee Investment Certificates see dramatically reduced income and incentives.
At Jubilee Fund our JICs have a positive social impact of $4 for every $1 invested and pay the investor 2 percent below prime. Well when the prime rate is 0.5 percent this means our social impact investors have not been receiving a cash return on investment (ROI) for a while now and Jubilee Fund. The good news is the social ROI is high enough that people continue to invest in JICs.
So why does the interest rate fall sometimes?
Well the opposite of inflation is deflation and on the surface this may sound good but deflation means reduced economic activity, reduced investment, and reduced economic growth, which can lead to fewer jobs and is often a sign of recession.
The Bank of Canada has kept interest rates low over the past 12 years in part as a way to combat recession. COVID-19 has introduced an unpredictable force that has driven prices higher and while the BoC has done its best to keep rates low they will likely increase now that inflation has topped 5 percent in January of 2022.
Non-profits should expect to see higher prices in the coming months/years as interest rates increase. If you have any loans or mortgages now might be the time to consider locking into a longer term interest rate over the next three to five years if you are able to.
For non-profits with investments you should start seeing increased ROI which hopefully will assist you and weathering increased costs related to higher interest rates.