How has the Bank of Canada responded to inflation?
Between March 2022 and July 2023, the BoC increased its key rate of interest from 0.25% to five%, with the aim of slowing price growth and achieving its 2% inflation goal. Now that inflation has slowed, it will not be clear when the BoC will adjust the important thing rate of interest. Many economists expect rate of interest cuts to occur sometime in 2024.
How does inflation affect my investments?
Inflation reduces the profit you make from an investment.
Let’s say you purchase a stock that goes up 5% in a yr. Your “nominal” return before accounting for fees, taxes or inflation is 5%. But if inflation rises 2% in the identical yr, your “real” return is barely 3%. It is very important to calculate your investment profit based on an actual rate of return so that you would be able to properly assess where you might be investing your money. (Find out how inflation could affect your retirement investments.)
During times of high inflation, it is often difficult to make a profit on any investment – purchasing power decreases faster than most investments can grow. However, some investments are more proof against inflation than others.
Shares
Inflation can have a negative impact on the stock market as rising costs and rates of interest typically impact corporations’ profits. Investors are also psychologically reluctant to speculate money within the markets in the event that they imagine it is simply too dangerous, which further contributes to market declines. However, this scenario may provide a possibility to purchase high-quality, large-cap corporations at a slight discount.
Tie up
When inflation rises, bond prices fall and vice versa. That’s why long-term bonds could be a tricky business. However, a short-term bond, reminiscent of a one-year bond, might be an excellent place to park money when inflation is high until it becomes clearer where inflation and rates of interest are heading.
GICs
Guaranteed investment certificates (GICs) look like an excellent deal in times of high inflation. For example, in 2022 and early 2023, you would get GICs with rates of interest of around 5%, higher than the around 1% offered in recent times. That may sound great, but considering that inflation was between 5% and eight% during this era, the actual return could possibly be negative. Still, GICs are a viable alternative for low-risk investors who would otherwise keep their money in money. (Click below to see current rates.)
ETF
Exchange traded funds (ETFs) are a basket of assets, often stocks, bonds, or a mixture of each. Canadian investors can select from a big selection of ETFs with various levels of performance and risk. Broad-based market ETFs are likely to be a conservative and straightforward selection for investors in all market cycles in the event that they are willing to carry for the long run.
