Although interest rates have been on the decline for several quarters now, and 2025 was supposed to be the year where many investors, analysts, economists and policymakers were hoping to see a soft landing, the consistent threat of tariffs and the start of a trade war have created a tonne of new complications.
Many experts continue to weigh in on how tariffs could affect trade and, ultimately, the economy. However, even though most agree that tariffs and a trade war would be detrimental to every country involved, there is still a tonne of uncertainty about how badly each country and industry could be impacted.
It’s not just about the uncertainty of so many unprecedented tariffs. It’s also the uncertainty about which industries will see tariffs, how much those tariffs will be, how much they will impact trade and how long this entire trade war will last.
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What’s going to happen with interest rates?
Under normal circumstances, slowing economic growth and signs of disinflation would prompt central banks to lower interest rates. And in fact, there’s still widespread belief that more rate cuts will occur in 2025.
However, if tariffs continue to escalate, the global economy could face conflicting pressures that complicate the path forward for central banks.
On the one hand, higher tariffs will almost certainly weigh on economic growth both in Canada and the United States. That’s because trade wars tend to reduce business investment, restrict supply chains, and lower consumer confidence. These are all negative forces that, in theory, should prompt central banks to lower interest rates to stimulate economic activity.
However, if tariffs remain in place long-term or a full-blown trade war erupts, it could push prices higher since tariffs raise the cost of imported goods, and those costs get passed onto consumers.
This is creating more complications for central bankers, especially after we just got through a period of surging inflation. And that’s what’s creating so much uncertainty in the economy today.
In the short term, interest rate cuts may still be the most likely scenario, especially if the economy continues to slow due to higher unemployment and lower consumer confidence.
With that said, if tariffs persist or begin to raise consumer prices significantly, inflation could once again become a major issue. That would leave central banks with little choice but to hold rates higher for longer or, in a worst-case scenario, hike them again.
What Canadian stocks should you buy if tariffs cause rates to rise again?
If tariffs push inflation higher and cause central banks to keep interest rates elevated, some parts of the market could struggle, especially those reliant on cheap debt or strong consumer spending. However, defensive stocks that provide essential services and generate consistent cash flow would likely fare much better.
That’s why one of the best bets to consider amongst all this uncertainty is a low-risk, low-volatility stock like Fortis (TSX:FTS).
As one of the best and largest utility stocks, Fortis can help protect your capital over the long haul while generating significant passive income for investors in the near term.
In addition, Fortis operates in a highly regulated industry, which gives it predictable earnings and the ability to pass some cost pressures onto consumers.
So, although higher interest rates would still negatively impact Fortis and increase its cost of borrowing, the company has a strong track record of managing its debt and strategically timing capital investments.
In addition, Fortis has shown time and again that it can weather any market environment with its incredible streak of dividend increases that’s lasted for a whopping 50 straight years. And today, the stock offers investors a dividend yield of roughly 3.8%.
So, although a high-rate environment would present challenges for many sectors, Fortis is exactly the type of stock that can continue to perform well regardless of the macroeconomic environment.
Therefore, if you’re looking for reliable investments in this uncertain economic landscape, finding safe and reliable businesses like Fortis is your best bet.
