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Will interest rates start going down?

Impact of interest rates

Recent news headlines have included a lot of commentary on interest rate hikes potentially being over and even the possibilities of seeing rates starting to come back down.

This potential shift in policy makers’ direction could have a significant impact on consumers financial plans, including mortgages, savings, investments, and more—but the time to start celebrating is not here just yet.

For this week’s column, let me start by explaining why we’ve seen such dramatic rate increases, why we may see a reversal in these policies soon and the implications this shift may have on your finances:

Why did they go up?

In response to rising inflation and the need to cool down an overheated economy, central banks have increased interest rates over the past few years. For instance, the Bank of Canada (BoC) has been raising its benchmark interest rate steadily since March 2022. These rate hikes have had various consequences, including affecting borrowing costs, savings account yields, and investment returns. However, recent economic developments have raised the possibility of a change in this trajectory.

Why might this stop?

Economic conditions can shift rapidly, and central banks like the BoC continually monitor indicators to guide their monetary policy decisions. If economic growth slows, inflation remains under control, or other concerns arise, central banks may pause or even lower interest rates. This reversal is a significant departure from the tightening cycle seen in recent years.

Why should you care?

1. Mortgage borrowers—Canadians with variable-rate mortgages may benefit if interest rates stop rising or are reduced. Their mortgage payments would likely become more affordable, freeing up funds for other financial goals, such as debt repayment or investing. However, those with fixed-rate mortgages won't experience an immediate change in their monthly payments.

2. Savings accounts—In a rising interest rate environment, Canadians may have seen modest increases in the interest earned on their savings accounts. A reversal of interest rate hikes could lead to lower yields on savings accounts. This could prompt savers to seek higher-yield alternatives, such as high-yield savings accounts, certificates of deposit (CDs), or other investment options.

3. Investors—The impact on investments can be mixed. Lower interest rates can stimulate borrowing and spending, potentially benefiting businesses and stocks. On the other hand, bond prices tend to rise when interest rates fall, which can be good for existing bondholders but may result in lower yields for new bond buyers. Equity investors should monitor market conditions and consider diversification to mitigate risks associated with interest rate fluctuations.

4. Debt management—Lower interest rates can offer opportunities for Canadians to manage and pay down high-interest debt more efficiently. Consider refinancing high-interest loans or credit card balances if you were forced to take out a loan during the peak. Reducing high-interest debt can free up more funds for long-term savings and investment goals.

5. Savings and planning—Canadians may need to adjust their financial plans based on the shifting interest rate environment. If yields on traditional savings accounts and fixed-income investments decrease, consider exploring alternative investments or asset classes with potentially higher returns. Diversification remains a key strategy to manage investment risks effectively.

6. Economic uncertainty—While a reversal of interest rate hikes may provide temporary relief, it's essential to remember that rates falling are due to economic conditions changing. A prudent financial plan should consider various scenarios and emphasize long-term financial goals. Consumers should focus on building a diversified and resilient financial portfolio that can withstand economic uncertainties.

7. Monitoring inflation—You should keep an eye on inflation trends, as they play a significant role in central banks' interest rate decisions. Rising inflation can erode purchasing power, making it important to seek investment opportunities that outpace inflation and protect long-term wealth.

The potential for stopping and reversing interest rate hikes underscores the dynamic nature of the financial landscape. Canadians should approach these developments with a strategic mindset and a long-term perspective as much as possible.

Seeking advice from a certified financial planner about how to adapt your plans for a shifting rate environment can help ensure a secure and resilient financial future, regardless of interest rate fluctuations.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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