Interest and Inflation Rate Hikes Ahead? Time to Manage Real Wealth

After holding interest rates at 1.25 percent since January, the Bank of Canada appears ready for raise the rate in its next announcement, July 11, when many economists expect it to increase to 1.5 percent. This small jump could affect millions of Canadians and is an opportunity for advisors and clients to lean in and plan for change.

Interest rates are one tool at the bank’s disposal to keep inflation in check, around the 2 percent mark. Due to steady growth in the Canadian economy in recent months, plus increases in gasoline prices, inflation is at or above this targeted level. According to a May 30 Globe and Mail article, “The odds of a July rate hike is now just shy of 80 percent, up from slightly more than 50 percent on Tuesday, according to Bloomberg’s interest rate probability tracker.”

The article goes on to speculate on the nuances of language in the central bank’s May 30 announcement as an indicator of what is to come in the next announcement, but what does all this talk of a probable interest rate hike mean for Canadians? And how can you help your clients manage in the face of rising interest rates? 

1. Your clients will need your help not only to save and plan for home ownership, but also to develop broader strategies for building wealth. An article in the May 30 KBR pointed to real estate ownership as one of the three big secrets to wealth accumulation and financial success. But rising interest rates will mean that home ownership will get tougher for Canadians to achieve, especially with new mortgage stress test rules in effect that require home owners to be able to afford a rate that is the greater of the Bank of Canada’s benchmark mortgage rate (currently 5.34 percent), or the rate negotiated by the buyer with their lender, plus two percent.

2. Your clients will need your good counsel on debt management strategies to shore up their chances of financial success. In addition to mortgages, any form of debt will become more costly to service. Anyone carrying debt such as student loans, lines of credit, credit card debt and more will be stretched even further than they currently are.

3.  Real Wealth Management requires a solid look at the effect of taxes, inflation and fees on accumulation, growth, preservation and transition of family wealth.  This framework will help you have better discussions about lifecycle changes in the context of emerging economic cycles.

Rising interest rates have a very real impact on your clients’ ability to be financially successful.  Make appointments now to discuss debt loads, and forward-thinking investment strategies.  Stay tuned to KBR to stay informed and prepare for this developing trend.

Additional educational resources: You can prepare your clients for impending interest rate hikes with the debt management strategies you’ll learn in Knowledge Bureau’s Debt and Cash Flow Management course. And the Real Wealth Manager designation will give you all the tools you need to help them plan for and afford the home of their dreams—a cornerstone in a broader, more holistic approach to building wealth.

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