The pause did not hold. After standing still in the spring, the Bank of Canada resumed hiking in June, and on July 12, 2023 it is widely expected to push the overnight rate to 5.00% — a level Canada has not seen since 2001, and what looks increasingly like the peak of this cycle. For BC borrowers, the message has hardened. The "wait for the cut" thesis that tempted owners through the spring pause has been answered: rates went up, not down, and the prudent planning assumption is now higher for longer, not relief around the corner.
At 5.00%, the prime rate climbs to roughly 7.20%, and every dollar of variable-rate debt on your balance sheet just got more expensive again. This is not a moment for alarm; it is a moment for prioritization. When capital is genuinely expensive and may stay that way, the single highest-return financial decision most BC owners can make is also the most boring one: pay down the most expensive variable debt, and stop financing things that don't earn more than they cost.
Why this looks like the top — and why it shouldn't change your discipline
Several signals point to 5.00% being near the ceiling: inflation has come well off its 2022 peak, the lagged effect of fifteen months of tightening is still working through the economy, and the Bank itself has emphasized data dependence rather than a pre-set path. The market increasingly treats this as the cycle high.
But "near the top" is not "about to fall." The more important shift is in the shape of the plateau. Even if the Bank stops here, it has signalled no rush to cut, which means borrowers should plan for these rates to persist well into 2024. Planning for a quick reversal is how owners get caught. The discipline that pays off now is built for a plateau, not a cliff.
Prioritize variable debt: the highest-return decision available
When prime sits near 7.20%, paying down a dollar of variable-rate debt is a guaranteed, tax-considered return of roughly 7%+ with zero risk. Very few growth investments clear that hurdle with certainty. So the first question for any spare dollar becomes: can I deploy this at a return that beats paying down 7% debt? Often the honest answer is no.
A simple priority order for available cash:
- High-rate variable debt first — operating lines run at "prime plus," credit-card balances, expensive equipment financing. This is your most expensive money.
- Variable term debt that you can prepay without penalty.
- Then discretionary capital projects — but only those with a return that genuinely exceeds your cost of capital at 7%+.
This is not a call to hoard cash or stop investing. It is a call to apply a stricter hurdle rate. At the top of the cycle, "it pays for itself eventually" is no longer good enough; the project has to beat the certain 7%+ return of deleveraging.
A worked example: paydown versus a marginal investment
Consider Cariboo Logistics Ltd., a BC firm with $300,000 drawn on a variable operating line at prime + 1.0% (about 8.20% at the new prime) and $120,000 of surplus cash from a strong quarter. The owner is weighing two uses for the cash.
Scenario A — Buy a second delivery vehicle. The truck costs $120,000 and the owner projects it adds about $11,000/year in net operating contribution — a roughly 9% pre-financing return. Attractive in a low-rate world. But the operating line still sits at $300,000 costing 8.20%, and the new asset adds maintenance, insurance, and a driver. The incremental certainty is modest and the line keeps bleeding interest.
Scenario B — Pay down the line. Apply the $120,000 to the operating line, cutting it from $300,000 to $180,000. The interest saving is $120,000 × 8.20% = $9,840 per year, guaranteed and risk-free, plus the line's headroom is restored for genuine emergencies. The owner gives up the truck's projected $11,000 — but that figure is uncertain, carries new costs, and depends on demand holding.
Comparing apples to apples: the paydown delivers ~$9,840 of certain annual benefit; the truck offers ~$11,000 of uncertain benefit net of real risks and new operating costs. At the top of a rate cycle, the disciplined owner usually takes the certain 8.20% return, restores liquidity, and revisits the truck when either demand is proven or financing is cheaper. Deleveraging at the peak is rarely the exciting choice — it is almost always the right one.
Beyond paydown: protecting the business at the peak
Prioritizing debt reduction is the headline, but a few companion moves matter at the cycle top:
- Map your variable exposure precisely. Know exactly which facilities float and what a sustained 5.00% does to your annual interest versus your December assumptions.
- Term out what you can't pay down. For debt you'll carry regardless, fixing the rate near the cycle peak removes the (smaller now) risk of a further surprise hike and gives you budgeting certainty.
- Defend covenants proactively. Higher interest expense compresses coverage ratios. Recalculate yours at 5.00% and, if you're getting close, talk to your lender before a breach, not after.
- Tighten working capital relentlessly. Receivables and excess inventory financed at 7%+ are pure drag. Collecting faster and stocking leaner is the cheapest deleveraging there is — it frees cash without borrowing.
- Raise your hurdle rate formally. Make it an explicit rule that new discretionary spending must clear a return above your true cost of capital. Write it down so it survives the next exciting opportunity.
What about growth — does deleveraging mean standing still?
A fair objection: if every spare dollar goes to debt, when do you grow? The answer is that prioritizing paydown does not mean abandoning growth; it means raising the bar growth must clear. At the cycle peak, a project should pass three tests before it beats deleveraging. First, the return must materially exceed your true cost of capital — not edge past it, but clear it with margin, because the comparison is against a certain ~7–8% from paying down debt. Second, the payback should be relatively quick, since a long payback at high rates compounds the risk that conditions change before the investment pays off. Third, the project should not erode your liquidity buffer to a point where a demand shock or a slow-paying customer forces you back onto the expensive line you just paid down.
Projects that pass all three are worth pursuing even now — a genuinely high-return expansion, an automation that cuts labour cost permanently, an acquisition at a sensible multiple. The discipline simply filters out the marginal ones that only made sense when money was free. In practice, applying this filter often reveals that one or two of your shortlisted projects are genuinely compelling and the rest are better deferred until financing eases. That clarity is itself valuable.
Higher for longer: planning the plateau
The strategic reframe at the peak is to stop forecasting a return to cheap money and instead build a business that is healthy at these rates. That means margins wide enough to service debt comfortably at 7%+, a balance sheet light enough on floating debt that the next surprise doesn't hurt, and a cash buffer that lets you act from strength rather than scramble. Owners who internalize "higher for longer" in mid-2023 — rather than waiting for relief that arrives slowly, if at all — will be the ones positioned to pounce when rates do eventually fall, because they spent the plateau getting stronger instead of holding their breath.
Key takeaways
- The expected July 12, 2023 move to 5.00% lifts prime to roughly 7.20% and looks like the cycle peak.
- Plan for higher for longer; a quick reversal is the wrong base case.
- Paying down high-rate variable debt is a certain ~7–8% return that few investments beat — make it your first priority for spare cash.
- As the Cariboo example shows, a certain deleveraging return often outranks an uncertain growth project at the cycle top.
- Term out unavoidable debt near the peak, defend covenants early, and tighten working capital to deleverage without borrowing.
At the top of the cycle, the unglamorous move wins: pay down what's expensive, and let everyone else wait for a cut that owes you nothing.
RN Canada Accounting & Advisory helps BC owners map their rate exposure, prioritize debt paydown, and build a balance sheet that thrives at higher-for-longer rates. If you want a clear, numbers-driven plan for the top of the cycle, our fractional CFO team can build it with you.