Is your portfolio ready for higher interest rates?

The Bank of Canada decision to start raising its benchmark interest rate this week should come as no surprise to anyone who has been paying attention to their investment portfolios.

The Bank of Canada decision to start raising its benchmark interest rate this week should come as no surprise to anyone who has been paying attention to their investment portfolios.

The alarm bells for higher borrowing rates have been sounding for over a decade after central banks slashed them to near-zero in the wake of the 2008 global financial crisis.

Since then, rates have ebbed and flowed in a tug-of-war between inflation and recession. Most recently, it was the fear of a recession from pandemic-induced lockdowns that kept rates low. Now, concern over long-term inflation as restrictions are lifted have spurred this week’s increase.

For long-term investors saving for retirement, it’s neither good nor bad - just different. A properly-diversified portfolio should be flexible enough to adapt to the potential tectonic shift about to take place.  

To put things in perspective, the Bank of Canada raised its rate this week by 25 basis points to 0.50 per cent. Major Canadian banks have already responded by raising their prime lending rates to 2.70 per cent, from 2.45 per cent.

Economists polled by Bloomberg expect the central bank to raise its rate to 1.75 per cent by the end of the year. What the Bank of Canada does after that depends on how the economy reacts to the current rate hikes and many other variables such as the impact of Russia’s attack on Ukraine.