Insurance Investments Group Claims About us

Interest rate changes and your investments

Financial markets fluctuate for a combination of reasons, but few factors are as influential as when central banks set policy interest rates. Understanding the “why” gives you greater insight into how financial markets work and, more importantly, how the outcome can affect investment performance.

What are interest rates?

An interest rate is essentially the cost of borrowing money. Typically, it’s a percentage of the amount borrowed on an annual basis. For example, if you borrow $1,000 dollars and the interest rate is 10% annually, you owe $100 at the end of the year. The interest rates you pay on your credit card debt or your mortgage depend on various economic factors. Ultimately, though, they stem from central bank policy decisions. The Bank of Canada adjusts the target for its key rate on eight fixed dates each year.

Why do central banks adjust interest rates?

Central banks around the world set their respective monetary policy to manage currency and money supply. By controlling the cost of borrowing money, they can better support stable economic growth.

The Bank of Canada, for example, says its objective is to promote the economic and financial well-being of Canadians.

Policy-makers have determined that the best way to do this is by keeping inflation – the rate of change in the price we pay for goods and services – from rising too quickly. This is measured by the percentage change in the consumer price index.

The Bank of Canada sets its inflation-control target collaboratively with the federal government every five years. The current target is 2% (expires December 31, 2026) within a control range of 1% to 3%. Adjusting the overnight lending rate - often called the policy rate - is the primary tool policy-makers use to exert control. This number sets the rate that central banks use for lending to commercial banks, which guides the prime rate that banks then use to set rates for their customers for credit cards, lines of credit and mortgages.

What happens when central banks change the policy rate

Central banks raise interest rates when they want to slow the pace of rising prices. This increases the cost of borrowing, which slows business and household spending, and helps mitigate inflation over time.

Conversely, when economic growth is slow and employment is down, central banks will lower the policy rate to support business and consumer spending and spark economic activity.

How do rate changes impact your investments

This depends on the type of investments you hold. At a high level, here’s how rate changes have impacted common investments in the past.

Equities

Holding more high-equity investments can be beneficial when central banks cut rates because it makes borrowing money less expensive for those companies. Lower borrowing costs results in higher company earnings, which can be reinvested for growth or passed on to shareholders in the form of dividends. At the same time, investing in fixed income becomes less attractive when interest rates drop, so investors shift more money toward equities, driving up share prices.

Fixed income

Bonds tend to have an inverse relationship to interest rates: their price rises when interest rates go down, raising the bond’s potential return to the holder (if the bond is not held to maturity). This means investment funds holding bonds benefit because new bonds are issued at lower rates, making the existing bonds with higher rates more attractive, driving up the price.

GICs

Lower rates make the yield on GIC purchases or renewals less attractive. If you purchase a five-year GIC when interest rates are falling, your investment will be lower than a five-year GIC issued when rates were high.

Historical perspective: Market performance and interest rates

This line graph shows a dark blue line, a light blue line and an orange line, charting the market performance of the Morningstar Canada Core Bond Index and the S and P slash TSX Composite index in relation to the Bank of Canada Policy Rate. The dark blue line charts the performance of the Morningstar Canada Core Bond Index. The light blue line charts the performance of the S and P slash TSX Composite index. The orange line charts the Bank of Canada Policy Rate over ten years. The lefthand y-axis measures the market performance on a percentage basis starting at negative five percent and increasing in increments of five up to twenty-five percent. The righthand y-axis plots the Bank of Canada Policy Rate from zero percent up to six percent in increments of one. The x-axis plots the years from 2016 to 2025 in one-year increments. The dark blue line charting the performance of the Morningstar Canada Core Bond Index stays within a range from near-zero percent up to five percent over the ten-year period on the x-axis. Bond performance was steadily at its highest from approximately 2019 to 2022. Bond performance was steadily at its lowest from 2022 to 2025. The light blue line charting the performance of the S and P slash TSX Composite rises rapidly in 2016 to 2017, starting below five percent and rising near 25 percent. It declines with small peaks and valleys to below zero percent in 2020. The line rises again and plateaus between five percent and ten percent from 2021 to 2025. The orange line charting the Bank of Canada Policy Rate rises gradually from 0.5 percent in 2016 up to 1.75 percent in 2020. The line drops sharply to 0.25 percent in 2020 where its stays until 2022. The policy rate rises to 5 percent from to 2022 to 2024 then back down to 2.75 percent in 2025.

Returns: Compound annual return for >1 year; holding-period return of less than 1 year

Sources: Morningstar Direct, Bank of Canada

This line graph shows a dark blue line, a light blue line and an orange line, charting the market performance of the Morningstar US Core Bond Index and the s and p five hundred index in relation to the Fed funds rate mid-range. The dark blue line charts the performance of the Morningstar US Core Bond Index. The light blue line charts the performance of the s and p five hundred index. The orange line charts the Fed funds rate mid-range over ten years. The lefthand y-axis measures the market performance on a percentage basis starting at negative five percent and increasing in increments of five up to twenty-five percent. The righthand y-axis plots the Bank of Canada Policy Rate from zero percent up to six percent in increments of one. The x-axis plots the years from 2016 to 2025 in one-year increments. The dark blue line charting the performance of the Morningstar US Core Bond Index stays within a range from near-zero percent up to five percent over the ten-year period on the x-axis. Bond performance was steadily at its highest from approximately 2019 to 2022. Bond performance was steadily at its lowest from 2022 to 2025. The light blue line charting the performance of the s and p five hundred index rises rapidly through 2016 with two peaks above 20 percent around 2017 and 2018.  It declines with small peaks and valleys to below five percent in 2020. The line rises above 15 percent in 2021 and 2022 and then plateaus between ten percent and fifteen percent from 2022 to 2025. The orange line charting the Fed funds rate mid-range rises gradually from 0.5 percent in 2026 to 2.5 percent in 2019. In the 2020, the line drops sharply to 0.25 percent where its stays until 2022. The rate rises sharply to 5.5 percent in 2024 and ends at 4.5 percent in 2025.

Returns: Compound annual return for >1 year; holding-period return of less than 1 year

Sources: Morningstar Direct, Federal Reserve Economic Data

Key take-away: Manage the impact of interest-rate changes with a diversified portfolio

Investing in quality, professionally managed and diversified investment funds is helpful regardless of the current policy rate. With a diverse portfolio, you have access to several different asset classes, geographies and investment styles, which lessens your risk if one segment of the market underperforms others. Portfolio managers have the expertise to adjust allocations as market conditions change. A Co-operators financial representative is always ready to help if you have questions or would like to review your plan.

Stay up to date with our online tools and resources

For Mutual Funds

If you haven’t already, contact your financial representative to set up your mutual funds dashboard. The dashboard lets you easily review your account balances, transaction history, quarterly statements and year-end tax documents. Additional resources, including market commentary, insightful articles and portfolio and product information are also available to help you make the most informed investing decisions.

For Segregated Funds

Having a Co-operators Online Services account is a convenient way to keep tabs on your segregated funds. Through this easy-to-use, secure platform, you can view your personal and beneficiary information, the current value of your investments, contribution percentages and transaction history. You can also see the date you completed an Investor Profile Questionnaire. Access Online services today!

We're here to help!

Connect with your financial representative if you have questions or decide it’s time to review your plan.

© 2025 Co-operators Financial Investment Services Inc.
151 North Service Road, Burlington, ON L7R 4C2
1-833-631-4999

© 2025 Co-operators Life Insurance Company
1900 Albert St., Regina, SK S4P 4K8
1-800-454-8061

www.cooperators.ca


Mutual funds are offered through Co-operators Financial Investment Services Inc. to Canadian residents except those in Quebec and the territories. Segregated funds and annuities are administered by Co-operators Life Insurance Company. Not all products are available in all provinces. Individual circumstances may vary. You may wish to contact the licensed insurer’s representative or a licensed insurance agent if you need advice about your insurance needs. In Quebec, a licensed insurance advisor is a Financial Security Advisor or a Representative. The information contained in this communication was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This communication is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Fund Facts before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured or guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits. Their values change frequently and past performance may not be repeated. Co-operators® is a registered trademark of The Co-operators Group Limited and is used with permission.