How interest rate hikes impact the Canadian Auto Industry

A lot has changed for the auto industry over the past three years. We have gone from full parking lots at 0% financing, to empty parking lots and now to “half 2019 inventory” and skyrocket rates. On the other hand, from the consumer perspective, we have gone from a crazy used car market to the recent price drops due to the increasing inventory availability. A completely crazy scenario of changes in the past months.

Let's take a look specifically at how the recent interest rate hikes are expected to impact the next few months.

How rates are impacting costs & demand

In just 12 months, the overnight interest rate from the Bank of Canada has gone from 0.25 to 4.25.

Although we are still far away from the huge rates of over 40 years ago and inflation seems to be holding off, there are still some factors that result in a more deep impact across the industry here for us, Canadians.

1. Higher borrowing costs for consumers: If interest rates rise, it will be more expensive for consumers to take out a loan to buy a new car. This may lead to a decrease in demand for new cars, as consumers may decide to hold off on making a purchase until rates come down again. Most Canadians with leases, finances and any kind of deal from the past couple of years, will hold off to their contracts where the rate is somewhat “frozen” in time.

2. Decreased car sales: As a result of higher borrowing costs for consumers, car sales may decrease. This can have a negative impact on auto manufacturers and dealerships, as they will sell fewer cars and therefore make less money. Yes, we will see mainly used car dealerships struggle.

3. Increased costs for auto companies: Higher interest rates also make it more expensive for auto companies to borrow money to fund operations. This can affect their profitability and make it more difficult for them to invest in new technologies or expand their businesses.

4. Increased cost of imported cars: Although not expected to have a wider impact, higher interest rates may lead to an increase in the value of the Canadian dollar, which can make imported cars more expensive in Canada. This may lead to a decrease in demand for imported cars, which could negatively impact sales of imported brands in Canada.

Just hold tight and avoid buying/selling or making a big move with your vehicle. Buy/lease only if you really need to!