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Rate cuts | Movement is expected, get ready!

May 30, 2024

Our experts foresee imminent prime rate cuts. To remain vigilant about the potential implications of these cuts, let’s examine the connections between the business cycle and inflation, as well as 3 possible effects of these cuts on your clients’ savings and the opportunities resulting from them.


Economic growth and inflation

The business cycle, and more specifically a period of growth, has direct influence on inflation. Let’s recall the different stages of the cycle:

Strong growth → 

Weak inflation

Strong growth →

Strong inflation

Weak growth →

Strong inflation

Weak growth →

Weak inflation

Beginning of the business cycle with robust growth, but weak inflation, leading to a resurgence of inflation.

Economic growth along with strong inflation. Central banks raise interest rates.

Rate hikes to control inflation, which cools economic growth. Can sometimes lead to a recession.

Final stage where growth and inflation are both low, usually during a recession or heading out of one.


We are currently headed towards the last stage of this table, which is characterized as “weak growth, weak inflation.” Historically, this stage comes with a period of interest rate cuts which helps the economy to grow once again.

These cuts will lead to changes on the markets and in your clients’ finances, and these changes could be favorable to them. It’s a golden opportunity for you to connect with your clients and help them be better positioned quickly based on their needs and their investor profile.

Here are 3 effects that can involve their savings to consider.


1. Reducing cost of debts: invest more money

A prime rate cut could lighten the load of your clients’ variable-rate debts. It could therefore help them have more liquidity.

Note that a rate cut suggests that inflation is better controlled, which is positive for your clients’ portfolios. Those who have adjusted their budget to better cope with rising costs are likely to be under less pressure financially. They could have more flexibility to invest in their savings.


2. Decreasing returns for guaranteed investments: secure a GIF rate

Prime rate cuts have a downward effect on guaranteed investment returns, which are directly influenced by interest rates. The amounts invested in a high-interest savings account, offering a variable rate, could see their returns reduced straight away. Guaranteed interest fund (GIF) rates are also likely to be reduced.

To consider

It could be beneficial for some clients to invest in one or more GIF terms to take advantage of the rates before they decrease. This strategy would enable them to lock in the current returns, which could offer a certain stability to better balance their investment portfolio.

On the other hand, some might also see an additional reason to progressively integrate the fund market.


3. Increasing bond values: seize the opportunities

Prime rate cuts create a favorable environment for bonds.

As a reminder, bond returns are directly linked to the effective interest rates. Therefore, every rate change causes movements in the cost of bonds, which tends to decrease when interest rates increase and to increase when interest rates decrease.

For a brief explanation without getting technical, it is because existing bonds then offer higher rates than new bonds, which makes them more attractive and increases their cost. It’s also why, in a period of decreasing rates, bonds with a longer-term maturity see their value increase more than shorter-term or variable rate bonds.

In the current context, our experts at iA Global Asset Management (iAGAM) believe that “longer-term bonds [and] high-quality corporate bonds in the very short part of the yield curve” could be particularly interesting.


Remember that no matter how the markets behave, diversification remains essential. Bonds and guaranteed investments are incidentally interesting investment options to help better mitigate risks and therefore better protect your clients’ savings, based on their investor profile.



Topics : Investments, Economic news

Written by iA

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