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How will recent interest-rate cuts affect me as an investor?

As we get ready to wrap up 2001, this year may go down in history as one of the best examples of the role of the Bank of Canada and monetary policy.

A combination of worst-case scenarios; an extreme reversal in high-tech businesses that fueled much of the economy and plumped up equity-based portfolios, continued economic weakening and lack of consumer confidence, then terrorist attacks on the U.S. and the aftermath, has created an unprecedented challenge in economies and markets worldwide. Interest-rate cuts The key action the Bank of Canada takes to stimulate business and boost consumer confidence and spending is through interest-rate cuts. This year The Bank of Canada has lowered interest rates eight times for a total decline of 3 percentage points. For investors, stronger businesses and consumer spending can stimulate the stock market. While the stock market by nature is always unpredictable and risk-prone, a stable economic environment often results in business profits, which can create healthier stock prices. But not overnight. Delayed reaction The easing of interest rates, while having a significant affect on stimulating business and encouraging consumer spending, is a gradual process. Think of the Bank of Canada as being in the driver's seat and the interest-rate drop as turning the wheel to change directions. To stabilize the car, the wheel is turned by degrees, not with a quick-jerk reaction, and with additional calculated turns of the wheel, the car repositions itself and eventually heads in the direction that it intended. Changing directions in the economy is, of course, much more complicated, and slower, than turning a corner. According to the hindsight of economists, the process may take as long as a year to two years. That's why, despite the continued lowering of interest rates in both Canada and the U.S., economists don't predict a turnaround in the economy until next summer, if not longer. Dwelling on the short-term picture is often not an indication of the future, yet the media predominantly emphasizes bad-news scenarios. While experienced investors and financial professionals realize that the economy is currently in recession or very close to it, this period of weakness will pass and will be followed by stronger economic growth