Expert shares why BoC's "jumbo" rate cut won't really help most Canadians
The Bank of Canada (BoC) announced a massive interest rate cut this week, but one expert says it may not make a big difference for most Canadians.
The BoC dropped the rate by 50 basis points, bringing it from 4.25% to 3.75%, which many referred to as a “jumbo-sized” drop.
This was the fourth announcement of 2024, and such a low rate hasn’t been seen since December 2022.
According to Francisco Remolino, principal and licensed insolvency trustee at Toronto-based Remolino and Associates, this rate cut likely won’t dent the trillions of dollars of debt Canadians are drowning in.
Francisco Remolino/ Supplied
The latest statistics from Equifax indicate consumer debt levels in the country rose to $2.5 trillion in the second quarter of 2024, which marks a 4.2% increase from the same period in 2023.
Another report from the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) noted that the country’s rate of insolvencies has reached a scary new high regarding consumer debt.
That report found 35,082 Canadians filed for consumer insolvency in the second quarter of 2024.
“Many Canadians have significant debt, particularly mortgages, credit card balances, and personal loans,” Remolino told Daily Hive.
According to an Ipsos poll from 2023, a significant number of people across the country are struggling to pay off their bills.
It was found that almost half (46%) of Canadians carry at least some form of non-mortgage-related debt. The report also highlighted that many were “burdened” by their financial situations. Nearly half (48%) of those carrying non-mortgage-related debts said that trying to pay it off felt “stressful.”
“While lower interest rates might reduce monthly payments for those with variable-rate loans, the overall impact on disposable income may not be enough to make a meaningful difference,” said Remolino.
He noted that essential expenses like groceries and utilities remain elevated and that “a small reduction in interest rates won’t significantly alleviate these daily living costs.”
What rate will make a difference?
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Experts predict the BoC will push for more “aggressive” rate cuts, but how low do they need to go to make a tangible financial difference for Canadians?
Remolino said while it is “difficult” to pinpoint an exact rate cut that would help all Canadians, a more “substantial reduction, such as to 3% or lower, might have a noticeable effect on monthly debt payments.”
“That said, other factors like inflation, wage growth, and cost of living must also be considered,” he added.
“Without addressing these, even lower rates might not fully solve the financial struggles of many Canadians.”
According to CIBC, additional rate cuts are expected to be on the horizon, meaning that a 3% rate could happen sooner than later.
However, during Wednesday’s announcement, the BoC noted, “the timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook.”
What does this interest rate cut mean for Canadians?
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Remolino also provided some broader insights into the impacts of the most recent BoC announcement.
It could result in increased borrowing because lower interest rates “make loans more attractive for both businesses and consumers.”
“Businesses with debt, in particular, will see lower financing costs, potentially helping them manage cash flow better, invest in operations, or avoid layoffs. This could support broader economic stability,” he noted.
However, due to high debts and living costs, Canadians may not be included in increasing personal spending at this time.
The expert added that homeowners with variable-rate mortgages will likely see an “immediate” reduction in payments, which may offer some relief.
Canadians with fixed-rate mortgages won’t see the immediate effects of the cut, but lower rates when they renew could mean less financial stress in the long term.
While lower interest rates can provide short-term financial relief, Remolino emphasized the importance of long-term financial planning.
This comes with creating and sticking to a budget, establishing savings goals, and investing.
The last BoC interest announcement of 2024 will take place on December 11.
With files from Imaan Sheikh