BoC latest rate cut will influence these five personal finance trends in 2025
Financial uncertainties for 2025 are piling up, but we at least have a degree of clarity on interest rates and the economy.
Twelve months ago, we waited anxiously for interest rates to finally start falling and braced for the economy to lapse into recession. The view from here is more distinct – the Bank of Canada is firmly in rate-cutting mode, and the economy is, well, let’s just say it’s ducking a recession.
A Donald Trump presidency could do some damage to your finances next year and beyond. Already, Mr. Trump’s threat of 25-per-cent tariffs on Canadian and Mexican goods has contributed to a weaker Canadian dollar and stalled declines for mortgage rates.
But the interest rate cut by the Bank of Canada on Wednesday draws our attention back to the real numbers and fundamentals at work right now. Here are some trends for borrowers, savers and investors to watch out for next year:
More interest rate cuts are coming, and soon
Economists agree that the Canadian economy remains weak, and this suggests more rate cutting by the Bank of Canada. The next three dates the bank can adjust rates are Jan. 29, March 12 and April 16.
The bank’s trendsetting overnight rate is now at 3.25 per cent and economists see it falling as low as 2 or 2.25 per cent next year. This would bring tremendous rate relief to people with variable-rate mortgages and lines of credit. Each Bank of Canada rate cut is applied these borrowing vehicles.
A factor that potentially works against lower rates is a low Canadian dollar, which is helpful in one sense because it makes our exports more cost-competitive. But a weak dollar also feeds inflation. In fact, our sagging dollar was cited as a reason why food inflation will come in around 3 to 5 per cent next year, well ahead of the 2 per cent rate targeted by the central bank.
Fixed-rate mortgages will remain stuck in the near term
Bank of Canada rate cuts typically have minimal impact on fixed rate mortgages, which are influenced mainly by rates in the bond market and each lender’s level of feistiness in competing on rates for clients.
Investors sell bonds when they’re worried about inflation or the risk that bond issuers might default, and that in turn means higher rates in the bond market. Right now, there’s concern that the economic policies of U.S. president-elect Donald Trump will reverse the recent trend of easing inflation.
Default risk is also an American story, at least in a theoretical sense. The U.S. deficit is approaching extreme levels, worse than Canada, and bond market investors could at some point start losing interest in holding U.S. Treasury bonds. Rates would have to rise to keep these investors interested.
Falling GIC rates will push investors into risky territory
Money is still going into guaranteed investment certificates at elevated rates compared to five years ago, but the more interesting story is what’s happening with the money flows from maturing GICs. Investors are finding out that the rates being offered for today’s GICs are well below year-ago levels. And so, they’re looking at alternatives with higher rates.
Inevitably, this search is taking them to investments that couple higher rates with additional risk or complexity. This extends to dividend stocks, some of which offer both high dividend yields and the potential for share price declines or a dividend cut. Any investment product offering better returns than GICs comes with more risk of losing money. No exceptions.
People will hold too much cash
It’s completely understandable that mountains of cash are still piled up in savings accounts and savings products for investors – stocks look peaky, the economy is so-so and there’s that whole Trump thing. But the rewards for parking money safely aren’t what they were even a few months ago.
Keep some cash in savings for emergencies, then start directing the rest into long-term investments or debt reduction. Interest rates on all kinds of debt remain high, notably credit cards at around 20 per cent. If you have surplus cash and any debt at all, you know what to do. If stocks crash, it’s a great opportunity for long-term investors who understand the benefit of buying a low point.
The Canadian dollar will break your heart
The Bank of Canada’s aggressiveness on rate-cutting puts downward pressure on the dollar, which is already unloved in global financial circles because of our weak economic productivity and vulnerability to disruptions from south of the border. The obvious travel budget move in 2025 will be to explore Canada.
This article was first reported by The Globe and Mail
