Interest rate changes may affect your finances in ways you never considered.

These days, it seems like everyone is watching interest rates closely. Whether it’s the Bank of Canada, U.S. Federal Reserve Board, Bank of Japan (BoJ) or any other central bank in the world, there seems to be an intense focus on potential interest rate movements. Why? Because everyone is concerned about the strength of the global economy, and interest rate changes are a reflection of economic health. 

Many central banks keep interest rates low to help stimulate economic growth. Countries like Japan have taken things further and introduced negative interest rates, which means Japanese banks actually pay the BoJ to hold their money, instead of earning interest themselves. This is an attempt by the BoJ to encourage banks to lend out money cheaply, in hopes of jumpstarting the economy. Other countries like the U.S. have started to raise interest rates because their economies are heating up and they want to keep inflation under control.

However, a strong Canadian dollar is bad for exporters – as other countries must pay more for our goods – and also for investors in traditional bonds, since bond prices typically decline as interest rates rise. Increasing rates are negative for those who have outstanding debt (e.g., mortgages, car loans, lines of credit), where a rate increase results in higher borrowing costs. An environment where interest rates gradually rise often reflects an economy that’s growing in a steady manner, and this is usually positive for the stock market.

Interest rates can have more impact on people than it may appear. For instance, when rates rise in Canada, it leads to a higher dollar relative to other currencies, which is good for international travellers and for importers (by reducing the cost of foreign goods). Higher rates are also positive for savers (e.g., bank accounts, guaranteed investment certificates and other similar securities), who can earn more on their money.

Not sure what to do with your investments in an uncertain interest rate environment? We can offer guidance and access to strategies and product recommendations to help manage the impact of interest rate risk, regardless of which direction rates are heading.