Advisors give verdicts on interest rate hike

Rob Tetrault and Steve Tate weigh up the immediate and potential future impact of the Bank of Canada's latest rate hike

Advisors give verdicts on interest rate hike

A leading advisor has given the Bank of Canada the “benefit of the doubt” after it raised its benchmark interest rate a quarter-point to 1.25%.

However, Rob Tetrault, of Tetrault Wealth Advisory Group, believes the prospect of two further hikes this year is a concern and wants the BoC to be sure the numbers merit future hikes.

In announcing the rise, the Bank pointed to strong data, inflation at target level and an economy at capacity, and said further increases are likely. However, there was also cautious language and a warning that more stimulus will be needed to keep the economy at full potential. The Bank also red-flagged the NAFTA uncertainty as having a potentially negative effect on its outlook.

Tetrault’s concerns focused on how a series of hikes will add a significant amount of interest payments to, for example, people’s mortgages, credit card bills, credit lines and student loan payments.

He said: “You have to make sure you are not stifling the GDP and the growth that we’ve been expecting because if consumers stop spending, that’s going to hurt corporations, which is going to hurt taxes, which is going to hurt growth. I am always worried that they do this too quickly, but I guess the numbers were so strong that they felt they had no choice.

“I’m going to give them the benefit of doubt on this one and trust that they know what they are doing. I just want them to be very sure, if and when they do the next one, probably in the next four or five months, that the growth numbers, job numbers and the business confidence numbers merit the rate hike.”

Winnipeg-based Tetrault said damage to his client returns will be minimal, if any at all, and that his portfolios are light on bonds with only short-term duration getting a look-in. However, he admits he may revisit long-term bonds if there are more hikes later in the year.

“If you are able to get anywhere north of three on some quality bonds,” he said, “then that becomes appealing to some people. Aside from that, for us, we knew this [raise] was happening so it hasn’t changed our immediate strategy as of today. We continue to be underweight bonds and fixed income and if we do [change], we look at alternative.”

He added: “I have thought short-term bonds were pretty attractive for a while because the yield curve is pretty flat right now. What you are getting on a 30-year versus what you are getting on a two or three-year, there’s not that much difference; the only reason you are owning a 30-year bond right now is if you are convinced these interest rate hikes are not going to happen because the market is pricing them in at some level.”

Meanwhile, Steve Tate, founder of Tate Financial, said the obvious takeaway is that older people are going to be making a bit more money and younger people are going to be spending a bit more. He agreed with Tetrault that the immediate impact is negligible but said potential future rises are harder to analyse.

“If it goes up another quarter-point this year, then that’s ok too. Two more hikes? We’ll see. It’s all so dependent on external forces right now, especially NAFTA. If things keep ticking along as they are, and NAFTA can be salvaged, then two more interest hikes? Sure. I think we’ll need it in the future if things turn in the next economic cycle.”

He added: “We’ve been holding shorter-duration bonds anyway, just because we know we are in an increasing interest-rate environment. It’s not a surprise but at the same time, you can’t change people’s asset allocation just because interest rates are going to go up.

“The only thing you can do is look for investments that are impervious to those changes, whether they are foreign bonds or just lower duration.”

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