4 reasons why the latest interest rate cut matters for consumers

WATCH ABOVE: The Bank of Canada has announced it’s cutting the key interest rate by another 0.25 percentage points in the hopes of giving the economy a boost. Jamie Sturgeon explains.

Another interest rate cut from the Bank of Canada is important on many levels for consumers and households, not least because the central bank has confirmed what economy experts had begun suggesting in recent weeks: The country is in recession.

But there are other reasons Wednesday’s rate cut matters to the average Joe. Here’s a look at four of them:

We’re in recession

We’re in a recession. Or rather, the bank believes we were in a recession during the first six months of the year. Unfortunately the mere mention of the word tends to weigh on things like employment levels and consumer confidence; employers don’t hire if they think sales will soften and shoppers don’t shop if they believe their job is in jeopardy.

Story continues below advertisement

WATCH: The Bank of Canada governor was careful not to use the “R” word — recession — when he announced another cut to the key interest rate. Mike Drolet looks at what the cut means for you.

The bank believes growth has resumed in the third quarter (which began two weeks ago), but its last Monetary Policy Report in April called for growth in the second quarter (April-to-June period) which the bank now says actually saw a contraction of 0.5 per cent. If oil prices remain low (read: where they are now) and businesses rein in job postings and investment even more, might the central bank make a similar revision for the present quarter? Or year?

MORE: Canada’s economy shrinks again in April amid oil shock

Debt worries

Consumer confidence outside of harder hit oil-dependent regions has held up well, which has helped re-accelerate growth in consumer credit (pretty much all forms of debt outside of mortgage debt) this year, experts say. January’s rate cut helped too. If households remain confident, consumer leverage will again touch fresh highs.

Story continues below advertisement

The Bank of Canada says it’s willing to live with already-record consumer debt levels “edging higher” because the broader economy needs the shot in the arm now. Or as the bank said, “Additional monetary stimulus is required.”

MORE: Surging home values ignite boom in luxury auto sales, report says

Home run

Similar to consumer credit, mortgage lending has financed a sustained – and strong — upward movement in home prices as well as record sales in the large and pricey markets of Vancouver and Toronto in recent months. Prices were up again by double digits in those centres in June, numbers released Wednesday show.

Those trends, which worry some economists as affordability is stretched further and further, will be reinforced by Wednesday’s rate cut. Lenders will almost certainly drop variable rate mortgages to new lows, and fixed rates will also come under pressure, experts say.

MORE: Another rate cut could send pricey housing markets ‘off the charts’

Cost of living

The loonie plunged to a post-recession low of below 77.5 cents U.S. on news of the rate cut as foreign exchange investors rushed out of our dollar and into stronger currencies, like the U.S. dollar. That was a major – if not primary – goal of Wednesday’s rate cut, experts say; Canada’s monetary officials want to promote a lower loonie which will set the stage for a badly needed export and industrial renaissance (the jury’s still out).

Story continues below advertisement

The cut had the “desired effect” on our currency, Avery Shenfeld, chief economist at CIBC said, bringing the dollar to a level that could well become the “norm” for some time to come, he said.

While that’s good for industry, it’s bad for consumers who just saw the cost of living rise. Much of the country’s food is imported, not to mention clothing, furniture and innumerable other consumer goods are too. Those products are going to cost retailers more, which means they’re going to cost you more.

MORE: Sorry shoppers, lower loonie broadly lifting prices

Sponsored content