Navigating uncertainty is always a challenge, and it's even more difficult when the headlines seem to call for strategic adjustments almost daily. But from our vantage point, sentiment appears to be shifting: where there was a sense of paralysis that led companies to pause, leaders are moving forward and making decisions, and it's largely driven by proactively managing their interest rate risk exposure.

Three BMO leaders recently gathered to discuss how companies are managing interest rate risk in this volatile environment:

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  Steven Jensen, Head, Diversified Industries, BMO Commercial Bank, Canada (Moderator)

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  Cheryl Ferguson, Managing Director, Corporate Sales and Structuring, BMO Capital Markets

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  Shelly Kaushik, Senior Economist, BMO Economics

The following is a summary of their discussion.

As Jensen noted, daily events can seem overwhelming. The day before the discussion, the U.S. announced new 50% tariffs on a wide range of goods imported from Canada. What's different now is that Canadian businesses are taking a more constructive approach to navigating unexpected shocks.

"Over the last 12 months I've noticed that the business community is recognizing they will not have certainty," Jensen said. "They will not have clarity, whether it's in capital investment or capital expansion. And they recognize that they need to start placing bets and actually moving forward.”

Kaushik pointed out that the market's muted reaction to the tariff announcement is a signal that business leaders understand that constant uncertainty is the new normal. "We can't react to every headline, and that's a whole different world from a year ago," she said.

After two consecutive quarters of contraction, the Canadian economy has begun to pick up steam, though Kaushik noted Canada is not officially in a recession. Also, despite the uncertainty associated with the U.S.-Iran conflict and ongoing trade uncertainties with the U.S., excluding the energy-price shock, broader inflation has remained under control, close to the Bank of Canada's 2% target.

"That is, in part, a consequence of the fact that businesses are finding it hard to pass along those higher costs to consumers," Kaushik said. "But putting that growth picture and that inflation picture together, the Bank of Canada seems fairly comfortable holding rates at 2.25%."

Kaushik, however, cautioned against taking the BoC's stance as a sign that companies should become complacent. "There are a lot of risks underlying that forecast," she said, including the situation in the Middle East, volatile energy prices, and the trade environment.

The constant volatility complicates strategic planning, which can lead to complacency. But as Jensen pointed out, it's crucial to develop a risk management framework before a triggering event occurs. "Because if you're in the middle of it, you aren't going to be as well equipped," he said.

That's why, as Ferguson said, the more proactive management teams are adopting formal hedging policies against interest rate, foreign exchange, and commodity risks. She noted that a common misconception about hedging is that companies should hedge 100% of their exposure. Ferguson said while there are certain situations where that could be appropriate, most of BMO's clients hedge between 50% and 70% of their total exposure.

"They'll have a policy to hedge 50% of their exposure and manage that on an ongoing basis, for example," Ferguson said. "By not hedging 100%, you're still leaving yourself some flexibility if interest rates move lower, or if the exchange rate improves to your advantage."

There will always be periodic triggering events. But as Jensen said, leaders should evaluate their hedging strategies during moments of perceived stability. Because if you wait until a triggering event happens, it might be too late.

"This is an important moment in time when you could proactively create solutions for whatever is in front of you," Jensen said. "Having those conversations early and being equipped with knowing what's out there can help you manage those risk exposures."

The good news is that Canadian businesses are starting to heed the call. "Clients are starting to move, whether they're investing in an expansion, an acquisition, or beyond," Jensen said. "They're saying we're never going to get clarity, but we can't stay still forever. And in the absence of that clarity, I'd better have a rock-solid strategy."