The Bank of Canada decided today to cut interest rates for the second consecutive time in the past two months. The overnight interest rate moves down 25 basis points to 2.25% today. For context, a year ago, overnight lending rates were set at 3.75%.
The Bank of Canada governor, Tiff Macklem, noted that the Canadian economy is seeing structural weakness due to trade uncertainty, tariffs, and job losses. This is impacting business investment, and Canada saw a drop in exports. Canada’s gross domestic product (GDP) contracted by 1.6% in the second quarter!
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How does the BOC interest rate reduction impact investors?
The rate drops are both a pro and a con for investors. For the bad news first, the Canadian economy is noticeably weakening, and that could impact the bottom line for businesses that are exposed to tariff-impacted markets (steel, automotive, and some manufacturing). Business investment in Canada is tepid, and that is a damper on the overall economy.
The pro is that lending rates are getting cheaper. Financing expenses for an operating line of credit, a mortgage, or a business loan are now more affordable. Consequently, businesses that carry some leverage will find some relief here. Likewise, consumers with variable-rate loans will see some relief as their monthly interest expense declines.
Defensive dividend stocks could benefit
Businesses with long-term fixed assets/contracted income (like infrastructure stocks, pipelines, and real estate) will be able to refinance their debt at more attractive rates. Interest expense on any variable debt will quickly come down, and refinancings will see a reduced monthly payment. That should be a bonus to the cash flow statement for many of these companies.
Defensive dividend stocks like Pembina Pipeline, Enbridge, First Capital Real Estate Investment Trust, Dream Industrial Real Estate Investment Trust, Telus, and Fortis could enjoy some benefits from the interest rate reduction.
