With Rates on Hold, Here’s How I’d Position My TFSA Right Now

TD Cash Management ETF (TSX:TCSH) might be a great tool for cash reserves as the Bank of Canada considers its next moves while inflation returns.

Key Points
  • With the Bank of Canada paused, the next move is hard to predict, but rising oil prices and stubborn inflation could make future rate hikes more likely than cuts. Don’t bet the portfolio on one rate outcome—lean into dividend areas like utilities/energy and consider a cash-management ETF like TCSH for flexibility and yield instead of locking into long-term GICs.
  • Don’t bet the portfolio on one rate outcome—lean into dividend areas like utilities/energy and consider a cash-management ETF like TCSH for flexibility and yield instead of locking into long-term GICs.

With the Bank of Canada (BoC) on pause regarding interest rate cuts (or hikes), many investors are wondering what the next move will be, when it will happen, and what the implications will be for the broader TSX Index.

Will the BoC wind up following the lead of the U.S. Federal Reserve (the Fed) as a new chairman takes the helm? Time will tell. Either way, I think that it’s not easy to telegraph the next move of any central bank. Indeed, there are just so many variables to consider as employment clashes with inflation.

Personally, I think a prolonged pause followed by some interest rate hikes wouldn’t be out of the ordinary, especially if the U.S. Fed looks to stand pat for a while. Indeed, with oil prices marching higher and inflation poised to get out of hand again, I’d be more willing to bet on a hike than a cut, given where the cards stand today.

Woman checking her computer and holding coffee cup

Source: Getty Images

Rates are on hold for now. Inflation could change that

Of course, I could be wrong, and the BoC might prioritize employment above all else. In any case, inflation continues to linger. Perhaps it’s the everyday Canadian consumer who knows this better than anyone else. Groceries are expensive, and they keep getting expensive. With higher energy prices, prices could easily continue to rise. And with digital price labels, it’s easier than ever to adjust prices higher.

All it takes is the press of a button. Any way you look at it, the cost of living has become absurdly unaffordable. And there is fear that energy-driven inflation could continue to hurt consumers across the board. It’s an invisible tax, and it’s gotten unacceptably high, in my opinion, even if it’s well lower than the post-lockdown days. In any case, don’t expect the BoC to move well ahead of time. It seems like hikes will only be on the table until after another big rise in inflation hits Canadians’ wallets.

The BoC is considering its moves. Here’s how I’d respond

In any case, as rates stay steady, perhaps not reacting too drastically either way is the best move. Rates could rise or fall, but your portfolio should be ready to thrive in any scenario. In my view, the utility and energy scene is a great place to be for dividend yield. But what about safety plays?

As rates stay lower, I view the names as having what it takes to move ahead with projects without having to be weighed down as much by debt loads. Also, I’d have a look at a money market exchange-traded fund (ETF), perhaps like TD Cash Management ETF (TSX: TCSH), which boasts a yield of around 2.8%, which might offer greater flexibility compared to those who choose to lock their capital in for the long haul with a Guaranteed Investment Certificate (GIC). Don’t be startled by the “sawtooth” action in the stock, as it’s a steadier ship when you take into account the effect of the monthly payout of the equation.

If inflation gets bad enough to spark BoC rate hikes at some point in the coming two years, perhaps the lock-in move at a take when rates are modest isn’t the move. Either way, a cash management ETF has a decent enough yield and won’t cause the same kind of buyer’s remorse a long-term GIC would, especially if the BoC takes a more hawkish tilt from here.

Fool contributor Joey Frenette owns shares of the TD Cash Management ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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