When will Bank of Canada interest rate cuts help your bottom line?

The Bank of Canada cut its interest rate by a quarter of a percentage point to 4.25 per cent Wednesday morning, marking its third consecutive rate cut.

“The Bank’s preferred measures of core inflation averaged around 2 1/2 % and the share of components of the consumer price index growing above 3% is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services,” the central bank said in a statement.

The rate cut follows a report from Statistics Canada that showed the economy grew at an annualized rate of 2.1 per cent in the second quarter of this year.

After record-high inflation, a rate drop is what people have been begging for, but it’s going to take a while until Canadians actually notice a difference in their bank accounts.

Those who will notice an immediate change are those dealing with mortgage rates, variable rates, or lines of credit. Central 1 Chief Economist Bryan Yu says for everyone else, they’ll be waiting another year, as he predicts the rate will drop to 2.75 per cent by the middle of 2025.

“For a lot of consumers, it’s going to be a gradual shift in terms of impact for them,” Yu told 1130 NewsRadio. “We expect to see interest rates to continuously go down for the coming year and significant declines in overall rates.”

Yu says when it comes to the cost of living crisis, we’re “already there,” in terms of a lower inflation rate.

“That’s the reason why we’re seeing cuts from the Bank of Canada — we’ve moved to a more normal pace of price growth. It’s not so much that consumers are going to see their cost of bread or food come [down], it won’t. It’s just increasing at a much slower pace than we’ve seen in the last couple of years.”

He explains there are pros and cons to the rate cut. The upside is interest rates are dropping, but the downside is it’s a sign the economy is weakening.

“We look at the overall economy in its current time, we are still seeing that because of the higher interest rate period, there were a lot of cutbacks in terms of consumers, so people aren’t spending quite as much as they did before. They aren’t going to the restaurants like they had during the low interest rate times and also that post-COVID period, as well.

“We are now seeing that the overall economy is probably slowing through the coming year. We’re seeing companies hiring less than they would have previously and that means all that inflation pressure is dissipating.”

Yu says it’s important for the central bank to lower the rate slowly.

“The Bank of Canada is threading a needle. They’ve been trying to attack inflation to get us back to something more normal without slowing the economy too much and we’re at this period where we’re all hoping the economy kind of settles down into maybe a lower growth, but not explicit job losses in the economy and that’s the risk here. If inflation comes down too fast, we’re going to see further reductions in the workforce or labour market and of course, we’ll need even lower interest rates than anticipated.”

His advice to anyone as rates drop is to continue saving as much as possible. The Bank of Canada’s next interest rate announcement is Oct. 23.