Getting aligned with the Bank of Canada’s changing rates

With rate cuts on the horizon, our experts weigh in on adjusting your investment, saving and debt management strategies

Over the past few years, we’ve observed a steep climb in interest rates, driven by the Bank of Canada’s efforts to get a handle on post-pandemic inflation. As the calendar flipped to December 2023, a glimmer of progress emerged. Inflation cooled to 3.4 per cent, yet the march to the Bank’s 2 per cent target was still ongoing.

Against this backdrop, the Bank of Canada (BoC) held interest rates at 5 per cent, with an open-ended hint at potential decreases in 2024, contingent on the continuing battle against inflation.

Amidst these changes, Canadians have been feeling the impact of rising interest rates in their day-to-day financial lives — from mortgages to savings. But as we stand at a potential turning point, where interest rates might plateau or even decline, here are some key strategies Canadians can discuss with their financial advisors to navigate this shifting situation with confidence.

Positioning your portfolio to benefit from rate cuts

It’s crucial to understand how interest rate changes impact your investments. Lower rates can boost equities, especially growth companies, as well as sectors like utilities and real estate, which usually do well when rates are low.

The value of bonds — a fixed income investment that provides a steady payout — typically rises when rates fall. This means that bonds purchased before rate cuts could increase in value once the Bank starts to ease rates. “If the BoC is nearing that inflection point, fixed income should be high on the radar of investors looking for strong risk-adjusted returns,” says Aaron Young, vice-president of global fixed income at CIBC Asset Management.

The role of bonds in portfolio construction has elevated because they once again serve as a source of income, in addition to acting as a counterbalance to equities. With yields at decades highs, bonds provide both good income and potential for capital gains appreciation as yields fall. “Given their attractive income and upside potential, your bond allocation could be the most exciting part of your portfolio in 2024,” says Young.

In this uncertain climate, also consider the advantages of managed funds. These are handled by experts who adjust to economic changes and diversify investments across various assets to minimize risk. This strategy is vital for maintaining balance during market volatility, ensuring your portfolio isn’t too reliant on any one asset class.

For an investor looking to park cash to generate income, while foregoing upside potential of bonds, current GIC (guaranteed investment certificate) returns make them worth considering for short-term savings. With BoC rates expected to come down though, the window to lock in today’s eye-catching GIC rates may be closing.

Managing mortgages and simplifying debt

If you have a variable rate mortgage, now might be a good time to stay put, especially if rates are expected to go down. “This could mean lower interest payments over time, but it’s important to keep a close eye on how rates evolve,” says Carissa Lucreziano, vice-president of financial planning and advice.

For those with fixed-rate mortgages, consider the pros and cons of refinancing. “This involves understanding the costs of breaking your current mortgage and working with your financial advisor to identify the break-even point, where the cost of refinancing is offset by the savings from a lower rate,” Lucreziano says. Refinancing could be an opportunity to save on interest costs in the long run or even consolidate other debts.

With the prospect of decreasing rates, debt consolidation is another key consideration. This strategy involves combining your high-interest debts into a single loan with a lower interest rate, simplifying your payments and potentially reducing the total interest you pay over time. It’s important to talk with your financial advisor about the timing and feasibility of this move, to find the best alignment with the interest rates that are available to you.

Retirement planning with precision

If you’re in retirement or planning to retire in the next five years or so, consider how changing interest rates might affect your income streams from fixed-income investments like bonds or GICs. “Talk to your advisor about how lower interest rates might affect your retirement income projections and whether you need to make adjustments to your investment mix in retirement accounts,” Lucreziano says.

Seizing smart borrowing opportunities

If you plan to borrow money in the near future — for a home, car, education, etc. — consider how potential rate changes might impact your plans. With the potential for lower interest rates, borrowing for large purchases might become more attractive. “You may also want to consider leveraging lower interest rates for strategic borrowing. This could include investment in properties, businesses or other assets that are expected to appreciate or generate income,” Lucreziano says.

Preparing for tax shifts

Any changes in investment strategies, particularly if moving from bonds to stocks, can have tax implications. It’s important to understand these as part of your overall financial plan.

Engage in detailed tax-planning discussions with your financial advisor, especially concerning investment income and capital gains. Lower interest rates may affect the returns on certain investments, so it’s important to consider tax-efficient investment vehicles. For example, investing in tax-sheltered accounts like an RRSP (registered retirement savings plan) or TFSA (tax-free savings account) can be an effective way to manage your tax liabilities.

“Investors may also wish to consider Canadian dividend-paying equities which are tax-preferred, because of the dividend tax credit,” says Jamie Golombek, managing director of tax and estate planning at CIBC.

Staying informed and flexible

To keep up with changing economic times, it’s important to stay informed and tweak your plan when needed. With interest rates possibly changing in Canada in 2024, being proactive in how you manage your finances is key.

“Talking regularly with a financial advisor helps make sure your plan fits your goals and takes into account economic ups and downs,” Lucreziano says. These talks should cover how you manage your debt, where to put your investments and how to save better — all based on what’s best for your situation. The main idea is to be ready and flexible, so you can make the most of changes in the economy with advice that’s tailored just for you.

A CIBC advisor can help guide you to the best investment solution(s) to help you achieve your short, medium and long-term goals. Contact us today to start the conversation.

Advertising feature provided by CIBC. The Globe and Mail’s editorial department was not involved.