With such big fluctuations in the economy over the past few years, Canadians have had a hard time adjusting to new costs and high interest rates. The rapid change left many people frustrated as they tried to keep afloat even with everyday purchases. Recently the Bank of Canada lowered rates to 4.5% after holding them at 5% since 2023, and it is predicted that this rate-cutting pattern will continue into 2025. But what does this mean for the market and Canadian households?
Inflation dropped to 2.5% in July, marking the lowest increase of the Consumer Price Index (CPI) since 2021. While the lower interest rate and inflation rate are positive signs of the economy stabilizing, we still have a long way to go until consumers will feel the true effects.
“Although rates are starting to come down, they are still fairly high, which means we really won’t see big effects in the market until another drop”, says Moncton, New Brunswick Financial Advisor Serge Robichaud. “Even with the lower rates, it is going to take time for the economy and people to adjust. There is always a lag that can be unpredictable, and we need to keep a sharp eye on the ripple effects so our clients can be aware.”
Rates Still Pose Challenges
In order for the economy to have a ‘neutral level’ when it comes to interest rates, the Bank of Canada estimates that rates would need to stabilize at 2.25-3.25%. Currently, we are nowhere near those numbers. This means that while the interest rates have dropped, consumer spending will not strengthen enough in 2024 to see significant growth in business investment.
Mortgage Rates
This is where we will see both positive immediate changes as well as some challenges. For new buyers, the drop in interest rates will help housing affordability. “This is one of the pushes that the real estate market needs. With the predicted drops in rates that will continue into 2025, we will see more buyers who can invest in property,” Moncton’s Robichaud explains. While this is great news for new buyers, those who have mortgages that are coming up for renewal this year might not reap the benefits. New rates are likely to still be higher than what they were 4 to 5 years ago when they first purchased. “Even with higher mortgage renewal rates, it is a manageable issue because incomes have increased since the start of the pandemic to help balance.”
Saving Accounts and GICs
As the Bank of Canada continues to lower interest rates, the returns from traditional savings accounts and GICs will be affected. Robichaud shares that, “The relationship between loans and mortgages isn’t directly linear with savings rates. That being said, in order to compensate for lower lending rates, the BoC will usually also drop the interest you can collect on your savings”.
Consumer Spending
With inflation rates starting to drop it is predicted we will see a rebound in consumer spending. During the summer of 2024, there has already been an increase on travel spending among Canadians. Not only does inflation play a factor when it comes to consumer spending, but interest rates will help individuals determine how much disposable income they have to spend on material items.
Before the year’s end, additional cuts are expected to bring Canada’s interest rate to 4%. The Canadian economy will see significant changes as the rate continues to drop. What is important to note is that these changes won’t occur overnight. It will be well into 2025 before we settle into a new economy.
