The Governor of the Bank of Canada expects low interest rates will be here well into 2015, and notes that some banks may even be reducing rates. So it’s understandable that there isn’t much concern about rising interest rates in the short term. But the reality is, we should be preparing for rising interest rates that will inevitably come.
A recent poll of Canadians with retirement portfolios found that over half didn’t realise what impact rising interest rates could have on their investments. Those most likely to be affected are Baby Boomers closing in on retirement, as they are likely to have a significant amount of their investments in bonds or fixed income products.
After an extended period of low interest rates and volatile equity markets, many Canadians have loaded up on bonds. But most experts agree that this era of record low interest rates will end sooner that most Canadians realise. When interest rates rise, bond prices fall, negatively impacting savings that have bonds in their portfolios.
Unfortunately, the same survey also shows that the majority of Canadians aren’t planning to change their investment strategy. As none of us know exactly when and how fast interest rates will rise, we need to understand the risk this poses to retirement portfolios that are over-weighted in bonds.
Most of us understand the impact that rising rates could have on mortgages and loans. But, it’s equally important, especially for those of us approaching retirement and preparing to draw income from our savings, to be aware of the impact it can have on our investments.
The million dollar solution is increasingly unclear as the Governor of the Bank of Canada tries to figure out how to deal with stubbornly low inflation, while also trying to forecast when we might see an uptick in economic growth and potential inflation.
The benchmark interest rate has been unchanged at one per cent since 2010. Economy watchers are debating whether the next move will be a cut to spur economic growth, or an increase to cool potential inflation. With core inflation well below target levels at this time, markets are increasingly pricing in a possible rate cut by the Bank of Canada.
That said, some economists expect inflation to increase as our Canadian economy picks up, stimulated in part by continuing improvements south of the border. Many believe the Bank’s next move will be a hike in rates, but not likely until the second half of 2015.
So this is a continuing headache for the Governor of the Bank of Canada who must be losing sleep over continuing low inflation. But the current economic, retail and consumer price index data suggest that continuing ultra-low core inflation might not be as persistent as the Bank fears.
Ask yourself if you have the right asset allocation mix. For those who are heavily weighted in bonds or other fixed income products, I would advise that now is the time to review your portfolio and possibly change your investment strategy. If unsure, sit down with a trusted financial advisor to make sure your retirement savings are protected when interest rates do rise.
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