Why interest rates cannot fall just yet

This chart explains why retired investors have had mixed feelings about inflation compared to interest rates since the start of the COVID-19 pandemic. Each bar in the chart represents the inflation rate over the prior 12-month period.

In June, 2022, the year-over-year inflation rate peaked at 8.1 per cent, which hurt anyone on a fixed income such as retirees. While inflation has been trending down since 2022, it remains stubbornly above the Bank of Canada’s target of 2 per cent, which is why interest rates have not started to fall yet.

Of course, retirees don’t really want interest rates to fall. Back in early 2020, the yield on 10-year Government of Canada bonds was less than 1 per cent, which made it difficult to get a good return on savings without taking undue risk. Yields are now closer to 3.5 per cent, but they are almost certain to fall if the Bank of Canada is successful in bringing inflation down to 2 per cent.

If they do fall, the winners will be investors who hold long-term bonds or high-dividend shares. The losers will be investors who are overweighted in shorter-term GICs. At least everyone wins from lower inflation.