The Federal Reserve raised its key lending rate on March 16th. This important announcement takes place just two weeks after the Bank of Canada announced a rate hike. Canadian investors may be wondering: How will this affect me?
As with most economic and financial changes, there will be winners and losers. While everyone will be affected differently, it is likely that most of us will see an impact from this change. Whether that change is good or bad will depend on your financial situation. The way most of us interact with interest rates is through debt vehicles and investments. We pay interest on outstanding debt and receive interest/dividends/capital gains on our investments. For borrowers, the cost of capital will be increasing. For lenders, income will be increasing.
Debt instruments will be subject to the most predictable impacts of this increase. Mortgages, GICs, Bonds, Credit Cards, and Lines of Credit are all examples of financial tools that will see an immediate and significant impact. The effect of the increased rates on the stock market are not as predictable. For example, we may see financial firms (banks, insurance companies etc.) become more profitable as the cost of borrowing goes up. Conversely, companies that borrow in the short term to finance production will face higher costs that could lower profits.
The Bottom Line
It is understandable that announcements such as this generate uncertainty in investors. Rest assured that central banks do not act rashly, and this interest rate rise was predicted. Investors with well diversified and risk appropriate portfolios should take these changes in stride.
As always, if you have any questions about the markets or your investments, I’m here to talk.
Regards,
Robert Morton, CLU
President
Morton Financial Group
