Where Are Interest Rates Headed Next?


With interest rates climbing at an alarming speed, Gordon Pape asks his financially savvy followers where they think rates are headed next. Photo: anyaberkut/Getty Images

If the response to my latest poll turns out to be accurate, interest rates are about to stabilize. 

I asked my social media followers where they believed interest rates would be one year from now. There were four options from which to choose. Here are the results.

The same – 38 per cent

Lower – 35.2 per cent

Higher – 22.5 per cent

Don’t know/not sure – 4.2 per cent

The overwhelming majority (73.2 per cent) believe that rates have reached or are near their peak and will drift down from here. Only 22.5 per cent of respondents think they will be higher a year from now. In other words, the “higher for longer” theory doesn’t seem to have much credibility right now.

This was a random social media sample, so the results should not be viewed as scientifically accurate. However, they provide an insight into how a segment of the population is thinking. 

The implications are significant for investors. If you are among the minority that believes rates will keep rising, your investment strategy over the next year will be very different from someone who expects them to drop.

A rising rate environment suggests that inflation will continue at an unacceptably high rate, forcing the central banks to keep tightening. The result will continue to favour cash-type securities like high-interest ETFs and guaranteed investment certificates, along with shares in companies that have strong pricing power. Oil and gold stocks should do well in such a scenario.

Any securities related to real estate will continue to remain under pressure, as higher rates make housing more expensive. Interest-sensitive stocks like telecoms and utilities will also continue to struggle.

Stable or falling rates will create profit possibilities in a range of securities. Bonds, which have been hard-hit in the past 18 months, will offer the potential for capital gains as rates drop. Bank stocks should rebound as the risk of default lessens. Pipelines and REITs will be attractive again.

We got an indication of the current Bank of Canada thinking on Sept. 6, with the release of the latest policy announcement. The Bank stood pat for now but left the door open to more hikes in future if inflation doesn’t ease. Unfortunately, it doesn’t seem to want to do that. 

No one knows with certainty how the coming months will unfold. But if you have a strong belief on the direction rates will take, make sure you implement an investment strategy that reflects your views and that will reward you if you’re right.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.