Canadian Investors: How the Hike in Interest Rates Will Affect Your Portfolio

The Bank of Canada doubled interest rates to 0.5%. Here’s how it will affect your investments, and what you can do about it.

| More on:
think thought consider

Image source: Getty Images

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe owns TORONTO-DOMINION BANK. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

Bank sign on traditional europe building facade
Bank Stocks

Should You Buy Bank Stocks Now?

Canadian bank stocks are getting cheap. Is this the right time to buy?

Read more »

analyze data
Bank Stocks

2 Bank Stocks That Have Thrived Since the 2008 Crisis

The post-2008 recovery and subsequent growth of most Canadian banks have been quite impressive, but there are two that stand…

Read more »

Target. Stand out from the crowd
Bank Stocks

Market Correction Recovery: 1 Stock I’m Buying in Bulk

After the market correction hit last week, shares have been climbing. But are we in for another market correction? In…

Read more »

Top view of mixed race business team sitting at the table at loft office and working. Woman manager brings the document
Bank Stocks

Top 2 Stocks for Beginners in 2022

Bank stocks like Bank of Montreal (TSX:BMO)(NYSE:BMO) are top picks for 2022.

Read more »

analyze data
Bank Stocks

This Is a Great Time to Buy Stocks for the 1st Time

Stock pickers have access to better valuations for blue chips like Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

Read more »

A person suffering
Bank Stocks

Nervous Investors: Buy the BMO Canadian Banks ETF During This Recovery!

The TSX continued its rebound this week, which is why it's a great time to get on the Big Six…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

1 Canadian Bank Stock I’d Buy Before the Victoria Day Holiday

This Canadian bank stock has the potential to continue beating analysts’ earnings expectations when it reports its latest quarterly financial…

Read more »

edit Four girl friends withdrawing money from credit card at ATM
Bank Stocks

2 Bank Stocks That Pay Canadians Tasty Dividends

TSX companies such as Laurentian Bank of Canada and National Bank of Canada are well positioned to deliver outsized gains…

Read more »