Investoid

The Bank of Canada is indicating that it will raise interest rates in the near future. While inflation has been running above the BoC’s target for sometime, so-called ‘core inflation’ is now also above their comfort zone. Any interest rate hikes will have at least some effect on the economy and the current bull market we’re in.

In general, interest rate hikes are used to slow down a strong economy by making the cost of doing business (and personal living) greater, thus impeding consumption and investment. The bank has a fine line to walk between slowing down growth and causing a recession, the latter of which occurred in the early 1990s when interest rates went quite high to tame inflation.

In the markets, the financial sector is the most affected by interest rate hikes, since it directly affects their bottom line to a high degree. Highly leveraged companies will also face increased costs immediately and/or over time, depending what type of debt structures they have in place (eg. revolving credit, bond issues, etc.).

Since it’s unlikely that the bank will increase rates more than 0.25% in the upcoming move, I wouldn’t change my medium or long term investment plans around it. As I said above, the financial sector is likely to incur some short term pain so there could be some good buying opportunities in that industry. If you’re worried that there will be an elongated period of rate increases, then look for interest rate-insensitive companies, and move into more stable, slow growth companies. If the economy slows, profit growth will as well which will affect higher P/E companies more profoundly.