Interest rates are going up — here’s how to protect your wealth when they do

By Josh RubinBusiness Reporter
Mon., Jan. 17, 2022

Trying to read Bank of Canada press releases can be a little bit like taking a Rorschach test: They’re open to an awful lot of interpretation.

But after interpreting the Bank’s words these days — and looking at rising inflation — most observers are coming to a similar conclusion: Interest rates are going to be rising soon.

And that, say personal finance experts, means you should be taking a close look at your household finances — including any debt as well as your investment portfolio.

“Any change in the interest rates is going to have a direct impact on your household cash flow right now,” said Chuck Grace, a personal finance lecturer at Western University’s Ivey School of Business.

With annual inflation hovering around seven per cent in the U.S. and at 4.7 per cent in Canada, the U.S. Federal Reserve and Bank of Canada aren’t going to sit on their hands, said Grace. And acting against inflation, he warned, means raising the key overnight interest rate from 0.25 per cent, where the Bank of Canada has kept it for almost two years, Grace said.

Even Bank of Canada governor Tiff Macklem has been relatively clear, suggesting in October that the Bank could raise rates “in the middle quarters” of 2022. The Bank’s next rate decision comes Jan. 26.

“When the Fed and Bank of Canada see seven per cent and 4.7 per cent inflation, they’re concerned. They’re going to do something,” said Grace, who suggested the very first thing most Canadians should do is look at their debts, whether it’s line of credit, credit cards, mortgages or car payments.

Many, Grace pointed out, are at floating rates — if the Bank of Canada’s overnight starts going up, the interest you pay on many of your debts will go up, too.

“You should be taking a good, hard look at any debt you hold,” says Grace “and ask ‘can I afford this at higher rates?’”

Moshe Milevsky, a finance professor at York University’s Schulich School of Business, says Canadians should be looking at both sides of their personal balance sheets — liabilities and assets — before figuring out how to prepare for higher rates.

“Will a rise in interest rates have any impact on what you owe and what you have to pay? What sort of liabilities do you have? Are they tied to short-term rates, are going to mature soon and you’re going to have to renew at higher rates? That’s a problem — you’ll have to reposition your balance sheet,” said Milevksy. If your mortgage or other significant debts are locked in at certain rates for the middle to long-term, you don’t need to get too worried, Milevsky said.

On the asset side of the equation, Milevsky says you should take a good look at your portfolio, because any bonds you’re holding are about to take a hit.

“If you’re heavy into bonds, it’s time to prepare for the fact that that party may finally be over after 30 years of rising bond prices, and you may have to reposition that side of your balance sheet,” said Milevsky. “It’s a mathematical truism, namely that when interest rates head up, the present value of a bond goes down. It’s ironclad.”

The equity side of your investment portfolio, on the other hand, is a little more complex, Milevsky said.

It used to be that what was bad for bonds was, broadly speaking, good for equities. That’s not necessarily the case any more, Milevsky said.

“Whether and how equity prices move, that’s a lot more tenuous. That relationship seems to have been weakened over time. The performance of the economy and how COVID plays out will have a greater impact on equity markets than interest rates will,” said Milevsky. “If your business is running restaurants, I don’t think interest rates are the biggest thing that you’re concerned about right now. ‘Am I allowed to open, can I have people indoors? So some sectors of the economy are going to be sensitive to new factors that didn’t exist 10 or 15 years ago.”

Ivey’s Grace, meanwhile, says that there’s nothing wrong with checking your investments. But completely revamping your investment strategy just because interest rates are going up just doesn’t make sense.

“If you’re worried, talk to your adviser and tweak your portfolio. But don’t radically change it, unless your needs have radically changed,” said Grace.

There’s also the danger that any gains you hope to make by switching up some of your investments will be swamped, either by fees, or taxes, points out Janet Gray, an Ottawa-based financial adviser with Money Coaches Canada.

“People sometimes make emotional decisions. Before you make a big decision, actually take a look at the numbers. Sometimes the right decision is to sit, grin and do nothing,” Gray said.

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