RBC's Prime Rate Cut and the Shifting Landscape of Canadian Equities and Fixed Income

The Bank of Canada's September 2025 rate cut—its first since March—has sent ripples through Canadian financial markets, with RBC Royal Bank swiftly adjusting its prime rate by 25 basis points to 4.70%RBC Royal Bank announces change to prime rate^[1]. This move, driven by a weakening labor market, soft inflation, and trade uncertainties, marks a pivotal shift in monetary policy. For investors, the implications are twofold: a reevaluation of capital allocation between equities and fixed income, and a reassessment of sectoral outperformance in a lower-rate environment.

The Mechanics of the Rate Cut and Its Immediate Impact

The BoC's decision to reduce its overnight rate to 2.5%Bank of Canada delivers 1st interest rate cut since March^[2] was a direct response to a 1.6% contraction in Q2 GDP and a surge in unemployment to 7.1%Bank of Canada cuts key interest rate for first time since March ...^[3]. RBC's prime rate cut followed suit, lowering borrowing costs for variable-rate mortgages, HELOCs, and credit cards. According to RBC Wealth Management, this easing is expected to stimulate consumer spending and business investment, albeit cautiously, as core inflation remains above the 2% targetSlowing inflation grants rate cut from the BoC^[4].

The immediate effect on fixed income was pronounced. The Government of Canada's 5-year bond yield fell to 2.6–2.7%Bank of Canada to update interest rate this week and here's^[5], reflecting market anticipation of further rate cuts. Investors flocked to the 3- to 7-year segment of the yield curve, where yields offered a balance between risk and return2025 Fall Investment Directions | BlackRock^[6]. Meanwhile, corporate bond spreads tightened as trade tensions eased, signaling improved risk appetite2025 Midyear Outlook: Canada - RBC Wealth Management^[7].

Equity Sector Reallocations: Gold, Consumer Discretionary, and the Energy Dilemma

The Canadian equity market, as measured by the S&P/TSX Composite Index, has surged 19.63% year-to-date through September 8, 2025S&P/TSX Composite Index - Live Performance & Historical Ret^[8]. However, sectoral performance has diverged sharply. Gold mining stocks, buoyed by central bank demand and inflation hedging, have outperformed, with the sector accounting for a significant portion of the TSX's gainsGlobal Insight 2025 Outlook: Canada - RBC Wealth Management^[9]. Consumer discretionary and technology sectors also showed resilience, driven by domestic spending and AI-driven earnings growthBank of Canada September 2025 Rate Decision: Jobs …^[10].

Energy, however, remains a mixed bag. While oil prices stabilized in the $65–$75 range, providing cash flow for producers, the sector's volatility reflects global trade uncertainties and U.S. tariff pressuresQuarterly Canadian outlook: Low but positive growth …^[11]. Bank stocks, traditionally sensitive to rate cycles, have benefited from improved credit conditions but now trade at a premium to historical averages, raising sustainability concerns2025 Canadian Market Outlook - BMO Private Wealth^[12].

Capital Reallocation: From Fixed Income to Equities and Alternatives

The rate cuts have accelerated a broader reallocation of capital from fixed income to equities. According to BlackRock's 2025 Fall Investment Directions, investors are increasingly favoring U.S. growth equities and alternative assets, such as real estate and infrastructure, to diversify away from traditional 60/40 portfolios2025 Fall Investment Directions | BlackRock^[13]. In Canada, this trend is evident in the inflows into equity ETFs, with the BMO S&P/TSX Capped Composite Index ETF (ZCN.TO) and iShares S&P/TSX 60 Index Fund (XIU.TO) attracting significant capital despite their negative one-year returns10 Best Canadian Index Funds to Consider in September 2025^[14].

Fixed income, meanwhile, has seen a shift toward shorter-duration instruments. RBC Wealth Management notes that while ongoing rate cuts should support fixed income returns, outperformance in credit is expected to be muted compared to 2024Global Insight 2025 Outlook: Canada - RBC Wealth Management^[15]. This underscores a risk-averse posture, with investors prioritizing safety over yield.

The Road Ahead: Policy Uncertainty and Sectoral Opportunities

The BoC's forward guidance remains cautious, with Governor Tiff Macklem emphasizing a “shorter horizon” for policy decisionsBank of Canada September 2025 Rate Decision: …^[16]. Analysts at CIBC and RBC anticipate further rate cuts in 2025, potentially bringing the overnight rate to 2.25% by DecemberEve of Decision: Bay Street's Outlook on the Bank of Canada^[17]. However, the path is not without risks. A potential U.S. administration shift could reintroduce trade tensions, while slowing population growth threatens domestic demandBank of Canada cuts target interest rate to 2.5% in September …^[18].

For investors, the key lies in sectoral agility. Gold and consumer discretionary sectors offer defensive appeal, while energy and industrials remain contingent on global trade dynamics. Fixed income, though less rewarding, provides a stabilizing anchor in a volatile environment.

Conclusion

RBC's prime rate cut and the BoC's policy easing have reshaped Canada's investment landscape. While equities have captured the spotlight, the real story lies in the nuanced reallocation of capital and the divergent performance of sectors. As the central bank navigates a fragile economic backdrop, investors must balance growth opportunities with risk mitigation—a challenge that will define the remainder of 2025 and beyond.