Investor Need-to-Know: Interest Rate to Stay at 5%

The interest rate held steady at 5%, so what does that mean for investors? And how should we be investing at this stage?

Canadians likely weren’t in shock on Wednesday as the Bank of Canada (BoC) held the key interest rate at 5%. It was the fifth time in a row that the bank held the rate steady, with economists expecting as much. Inflation may have slowed to 2.9% in January, and sure this was in target range. However, the bank stated inflationary pressures still persist, so more progress will be needed before rate cuts can begin.

exchange traded funds

Image source: Getty Images

What happened

While the move wasn’t anything crazy, it does show more positivity towards a rate cut. Especially as the inflation rate looks to be falling faster than expected. Dropping to 2.9% in January brought this key indicator within the BoC’s target range.

The drop was driven by lower gas prices and slower food price growth, which is great for consumers. Yet housing remained higher, and gas prices can be volatile. So they will likely wait for further confirmation that inflation is under control. What’s more, core inflation remained above 3%, so we are likely not going to see some rate cuts until June.

So even with all the pressure from businesses and homeowners to cut interest rates, the BoC remains cautious. Even so, the central banker remains optimistic about achieving a “soft landing,” and this would help to avoid causing a recession.

For now, the BoC believes that inflation will likely stay above 2% until at least mid-2024. Another economic forecast is due on April 10th, and this could potentially provide far more clarity about future rate decisions.

What investors need to know

Besides affecting your mortgage, there are a few things investors need to know when it comes to interest rates remaining stable. For one, inflation is slowing but remains above the target range of between 1 to 3%. So the rate will continue to stay there until it’s under control.

Furthermore, the BoC remains focused on core inflation, which excludes the volatile components like food and energy. Even so, the movement predicts that we still could see a cut as early as June, and that means investors should be quite cautious until at least then.

So how can investors prepare? Economists believe that at least until then, the focus should be on stability. This looks different for every investor, but there are some overall notes you can take. For instance, increase exposure to bonds. As interest rates fall, bond prices rise. This fixed-income investment can provide capital appreciation and higher coupon payments.

Consider other income-oriented investments as well. This would mean getting in on those guaranteed investment certificates (GIC). These will only remain around 5% until interest rates are cut. So I would certainly consider this area as well.

However, there are certainly areas in stocks to invest in as well, especially if you want exposure to income.  So let’s look at one option for those who are struggling to find a place to invest on the TSX today.

Get in on income

If you want a strong mixture of stocks and bonds, then I would consider an investment in an exchange-traded fund (ETF). An ETF is perfect for diversification as you can get a strong mix of stocks and bonds, with just the click of a button. What’s more, you have a manager watching your portfolio for you!

A great option to consider right now then is the BMO Monthly Income ETF (TSX: ZMI). This is a passively managed ETF that tracks the Solactive Canadian Monthly Income Index. It’s designed for investors wanting exposure to a diversified portfolio of income-generating Canadian securities.

These include investment-grade Canadian bonds and dividend-paying stocks, as well as real estate investment trusts (REITs). What’s more, it’s cheap offering a management expense ratio (MER) at just 0.5% as of writing. You can grab hold of a dividend yield at 5.14% as of writing, and again that comes out monthly!

So don’t get out of the market, simply shift within it. And hold onto your long-term goals, even in the face of rate holds.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

workers walk through an office building
Dividend Stocks

Nearly $500 Billion Is Coming for Canadian Investment: This Is the Stock I’d Buy

Canada’s $500 billion summit headline may take years to materialize, but Power Corp already owns a platform preparing to deploy…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Canada Says Aerospace Is Entering a Once-in-a-Generation Boom: 3 TSX Stocks I’d Buy

Canada’s defence boom is putting Montreal in the global aerospace spotlight, and three TSX names could ride the spending wave.

Read more »

pig shows concept of sustainable investing
Dividend Stocks

The Dividend Stock That Makes “Passive Income” Actually True

This Canadian dividend stock offers passive income backed by nearly two centuries of payments, recent earnings growth, and a 3.46%…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Canada Just Made New Investment Much Cheaper: This TSX Stock Could Win

Canada just made it far cheaper for businesses to invest, and CPKC is a big spender positioned to benefit.

Read more »

diversification is an important part of building a stable portfolio
Dividend Stocks

Here Are the Canadian Stocks I’d Feel Safest Holding Forever

These four Canadian stocks combine durable businesses, essential assets, and reliable dividends that investors could hold for decades.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Stocks for Beginners

Canada’s Next Investment Boom Could Be Worth $1 Trillion: I’d Buy This Stock Now

Canada keeps announcing mega-projects, and Finning could benefit if Carney’s $1 trillion push turns into real construction.

Read more »

Muscles Drawn On Black board
Energy Stocks

Canada’s Defence Boom Could Be Just Getting Started: 3 TSX Stocks I’d Buy Now

Canada’s defence buildout isn’t just about buying gear, it’s about funding Canadian capabilities in satellites, training, and manufacturing.

Read more »

dividends grow over time
Stocks for Beginners

Canada’s $500 Billion Investment Push: 3 TSX Stocks I’d Buy Now

Canada’s $500 billion summit splash is exciting, but the smarter play may be owning a few proven TSX operators already…

Read more »