Interest rates are dropping. What, if anything, will get cheaper?

Interest rates in Canada are finally coming down. The Bank of Canada trimmed its key policy rate for the third consecutive time on Wednesday, to 4.25 per cent, continuing an easing cycle that started in June.  

If you’re wondering what this means after years of high inflation and several cycles of rising interest rates, you’re not alone. Will high prices finally come back down to earth? Will mortgage rates get any cheaper? And why hasn’t the central bank moved more aggressively?

Here is a breakdown of what it means for Canadians.

Why did interest rates get so high?

Raising interest rates is primarily done to keep inflation in check.

As Canada was emerging from the COVID-19 pandemic, inflation reached its highest level in decades — 8.1 per cent in June 2022. The Bank of Canada, which typically tries to keep inflation between one and three per cent, responded with a series of rate hikes, taking its key rate from less than 0.5 per cent to five per cent by mid-2023.

Higher interest rates lead to increasing borrowing costs which in turn discourage people from spending and encourage saving.

The Bank of Canada is essentially trying to pull off what economists call a “soft landing” — reining in inflation without slipping into a recession.

Will my groceries be cheaper?

No. Prices are expected to keep rising, though at a much slower pace than in recent years now that inflation has slowed to 2.5 per cent.

“There was a level shift up in overall prices in Canada right after the pandemic and we are not going to see that level shift down. So people should not expect prices of everyday items to start moving back to where they were before the pandemic,” James Orlando, an economist at TD Bank told CBC News.

But the lower rate will make it less painful to borrow money — for a loan, a line of credit or a mortgage, for example.  

Does that mean I can finally afford a house?

Buying a house could be a lot more affordable because mortgage rates will be lower than they were a few months ago. Any current homeowners with variable rate mortgages will also see rates drop.

But any homeowners who locked their mortgage at a lower rate during the pandemic and now need to renew will probably end up renewing at a higher rate.

That sort of “interest rate shock” will affect an estimated 2.2 million homeowners — representing 45 per cent of all outstanding mortgages in Canada — in 2024 and 2025 according to data from the Canada Mortgage and Housing Corporation. 

Why have the rate cuts been so conservative?

Slashing…