The Bank of Canada finally announced the long-awaited rate hike Canadians expected. Interest rates rose for the first time since 2018 from its pandemic stance of 0.25%. This was the lowest the rate had been since 2008 after the financial crisis. Now, the rate has doubled to 0.5%.
Why the increase?
The rate increase was put in place to fight rising inflation. The relationship between interest rates and inflation works out this way. When interest rates are low, people are able to borrow more money. Whether it’s for buying a home or to use for investments, Canadians can borrow and therefore spend more. This allows the economy to grow, but also for inflation to rise.
The inverse is also true. When interest rates rise, Canadians aren’t able to borrow at those low rates any more. They may be tempted to start saving more because interest on their savings accounts is higher. With less spending, the economy slows, and inflation stops and even decreases.
How Canadians will feel it
When you think of borrowing, you likely think of a mortgage. That’s exactly where Canadians are likely to start feeling this first. Ultra-low interest rates led to a flurry of investment in the Canadian housing market over the last two years. But the rate hike could put a stop to that.
Now granted, rates are still low, but the Bank of Canada warned more are coming to slow inflation. So if you’re looking to get into the housing market, those rates aren’t bound to last long. Fixed rate mortgages will see no immediate impact, but when they come up for renewal those rates could be higher.
Variable rates have started becoming popular as they remain low, but that could change as well. As interest rates rise, your payments will be going more and more to interest and less to your principal. That will make it harder to pay off your mortgage sooner.
What about your stock portfolio?
This is a fickle part about interest rates. On the one hand, businesses won’t actually feel the impact of the rise in interest rates straight away. If the economy slows, it won’t be until the next few quarters that a decrease in business could occur. But it could happen.
Yet the market isn’t run by earnings reports, it’s run by people. And people react to news like interest rate hikes. So the more hikes happen, the more the stock market could potentially slow. Higher interest rates unfortunately tend to affect the market almost immediately, especially when it comes to growth stocks.
A safe place to stay
But there is one sector that won’t feel this as badly: the financial sector. The more news about interest rates comes out, the better the Big Six Banks do. That’s why it’s a great time to consider buying up bank stocks as protection, and taking your earnings from growth stocks.
One of the best choices has to be Toronto-Dominion Bank (TSX:TD)(NYSE:TD) because you get the best of both worlds. TD stock continues to expand throughout the world, and that includes online as well. It continues to increase its dividends, and will likely do so again in the near future. You can now pick up a yield of 3.51% as of writing.
Furthermore, TD stock still trades at a valuable 13.02 times earnings. That’s despite hitting all-time highs recently. That’s even after reporting strong earnings for the most recent quarter. So among the bank stocks, I would highly consider TD stock to fight off inflation and the effects of rate hikes.
