Financial planning | Interest rates are falling… What do we do?

The Bank of Canada has reduced its key rate by 0.25% three times since June, it is now at 4.25%. And the trend is certainly downward, according to the majority of economists. What impact for your financial planning?

Long-term projections roughly unchanged

To deal with the volatility of interest rates, the Financial Planning Institute has published each year since 2009 the Standards of Projection Assumptions on which financial planners can base themselves. Christophe Faucher-Courchesne, consultant at Banque Nationale Gestion Privée 1859, notes that, despite all the noise surrounding the cycle of interest rate cuts that began in June, the most recent update of the Institute’s projection hypotheses shows little change in interest rates. “For anyone with a long-term plan that’s holding up right now, there’s no need to make big changes,” he says.

Making up for lost time

Over a long period, we see that these periods of strong variations in interest rates like the one we experienced over the last two years in fact only constitute jolts which take place in time, explains Mélanie Beauvais, actuary, tax specialist and financial planner at Bachand Lafleur, consulting group. The rate increases have probably tightened the budget and caused some to reduce their savings. The rate cut will now free up liquidity, and one of the first things to do would be to bring savings back to their planned level and thus put the plan back on track, she suggests.

A plan to relieve stress

If there’s one thing that the sharp rises in inflation and interest rates in recent years have caused, it’s created enormous financial stress for many people. This period highlights the need for good financial planning, notes Mélanie Beauvais. “A good financial plan helps eliminate the short-term stress that these periods of high volatility create,” she says. And the recent period has highlighted the usefulness, if not the necessity, of building a reserve fund. For those who don’t have one, rate cuts will help do so, she believes.

Retirees, beware of CPGs

Retirees living off their investment income were very happy to be able to benefit from returns of 5% or more on guaranteed investment certificates (GICs). But be careful, because they may well not see these same returns when the time comes to renew them. Christophe Faucher-Courchesne recalls that since the year 2000, the return on GICs has always been lower than inflation, except for a brief episode in 2023-2024, when inflation was falling, but interest rates had not yet started to decline. You will therefore have to consider other investment vehicles to protect your purchasing power.

What will the stock markets do?

Recession risks are increasingly fading, economists say, and a soft landing of the economy accompanied by interest rate cuts is becoming the most likely scenario. In this context, it is conceivable to believe that a good diversified portfolio will offer a better return than GICs. But the stock market is not simple, recalls Christophe Faucher-Courchesne. The market increases of recent years mean that stock market valuations may have already anticipated a good part of the improvement in economic conditions. You will therefore need a well-balanced portfolio between stocks and bonds based on your risk tolerance to protect your return during this period of rate cuts, suggests the National Bank expert.