Policy Rate Cut: What Opportunities for Your Investments?
The policy rate drops to 2.5%: the effects to expect on stocks and bonds, and the strategies to consider.
On September 17, 2025, the Bank of Canada announced a cut to its policy rate, lowering it from 2.75% to 2.5%. This decision comes in an economic context marked by slowing growth, moderate inflation (1.9% in August), and a rise in the unemployment rate to 7.1%. But what does this cut mean for your investments?
Impact on stocks and bonds
Interest rates directly influence financial markets:
- Stocks: A lower policy rate reduces borrowing costs for companies, which can stimulate their investments and profits. This tends to support equity markets, especially in rate-sensitive sectors such as real estate and consumer spending.
- Bonds: When rates fall, existing bonds become more attractive because they offer higher yields than new issues. This leads to an increase in their market value.
GICs: returns in transition
Guaranteed investment certificates (GICs) are directly tied to interest rates. In times of high rates, they offer attractive returns with added security. However, with the current decline:
- New GICs will offer less competitive rates.
- Investors could consider redeploying their capital into bonds, which offer better liquidity and higher long-term return potential. Certain alternative investment mandates such as option writing, dividend stocks or real estate funds are also good alternatives.
Financial leverage strategies: a favourable environment
The rate cut creates an environment conducive to certain leverage strategies:
- Cash damming: This strategy involves borrowing at low cost (via a home equity line of credit) to invest in higher-yielding products. The spread between the cost of borrowing and the potential return becomes more advantageous.
- Smith Manoeuvre: It converts non-deductible mortgage debt into deductible investment debt. With lower rates, the cost of this debt is reduced, improving the net profitability of the strategy.
These approaches must be personalized and properly supervised, as they carry risks. They are particularly relevant in a low-rate environment, where the cost of capital is reduced and growth opportunities are more accessible.
In summary
The policy rate cut opens the door to:
- A revaluation of bonds;
- Strategic diversification of portfolios;
- More effective leverage strategies;
- A review of guaranteed investments such as GICs.
To take full advantage of this environment, it is essential to reassess your portfolio and your investment strategies. Don’t hesitate to contact us for a personalized analysis.
What a rate cut doesn’t tell you
A Bank of Canada decision is always part of a broader cycle. No one can predict with certainty the direction of future announcements, or how markets will react in the short term. That is why the avenues described above should be seen as possible opportunities to explore, not universal recommendations.
Historically, investors who maintained a disciplined strategy through rate cycles have generally weathered transition periods better than those who tried to time their decisions around the headlines. Your financial plan — not the day’s announcement — should remain your compass.
Questions to ask yourself, depending on your situation
A change in the policy rate can be a good opportunity to review certain elements of your file:
- Do you have GICs maturing soon, and what do you plan to do with the capital?
- Does your allocation between stocks, bonds and cash still match your investment horizon and risk tolerance?
- Could your mortgage or other debts be reviewed on more favourable terms?
- Have your goals evolved since your last portfolio review?
Risks to keep in mind
Remember that leverage strategies, such as cash damming or the Smith Manoeuvre, amplify potential gains — but also potential losses. They require solid financial capacity, a high risk tolerance and rigorous professional supervision. They are not suitable for every investor profile.
Likewise, the value of bonds and stocks fluctuates: a lower-rate environment may create possible opportunities, but no outcome is guaranteed. Every decision should be based on your overall situation, including its tax aspects, where every case is unique — consulting your advisor or tax specialist remains recommended before acting.
Let’s talk about it
If you are wondering how this rate environment applies to your portfolio, our team can review your situation and your goals with you, for information purposes and without pressure. Don’t hesitate to contact us to discuss it.
