Interest rates in Canada directly affect borrowing costs, economic activity, and investment performance. Understanding their impact is crucial for anyone building or adjusting an investment portfolio in 2025.
Why Rates Matter
The Bank of Canada adjusts interest rates to control inflation and stimulate or cool the economy. Rising rates can lower bond prices and slow economic growth, while falling rates often boost spending and borrowing.
Impact on Different Asset Classes:
- Bonds: As rates rise, bond prices fall. Shorter-duration or inflation-linked bonds are more resilient.
- Equities: Growth stocks often decline with rising rates, while dividend-paying or value stocks may hold up better.
- Real Estate: Higher mortgage rates can cool housing demand and affect REITs.
- Cash and GICs: Become more attractive as yields improve in a rising-rate environment.
What Investors Should Do:
- Rebalance portfolios to reduce rate-sensitive assets.
- Consider fixed-income alternatives, like laddered GICs or short-term bond ETFs.
- Stay diversified across sectors and geographies to reduce exposure to Canadian rate risk.
Monitoring the Bank of Canada’s policy updates will help you make timely, informed portfolio decisions.