The Bank of Canada followed up its previous 0.5% reduction in interest rates with another cut of the same magnitude today. At this point, it looks like our central bank is expecting to lower rates even more as it noted that “some further monetary stimulus will likely be required”. You can read the full text of the Bank’s statement here.
The surprising part of the rate cut is what didn’t happen. The big banks have thus far resisted matching the cut by the Bank of Canada and maintained the prime rate at 5.25%. If the banks do not lower the rates in lock step, consumers would not see a reduction in the interest paid on variable-rate mortgages and personal loans.
[Update: The major banks did match the Bank of Canada by lowering the prime rate by 0.5% to 4.75% later in the evening.]
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11 responses so far ↓
1 Nicolas // Apr 22, 2008 at 5:47 pm
It would seem that Desjardins acted first.
2 growthinvalue // Apr 22, 2008 at 5:50 pm
I’ve never understood this. Obviously, commercial banks aren’t legally obligated to raise or lower their rates to follow what the BOC is doing. But since they seem so reluctant to do so of their own free will, what are these BOC rate cuts accomplishing? It’s as if the Big Banks are saying “thanks for some relief on our own overnight lending rate, but we’re going to keep charging our customers what we are because we could really use the higher interest.”
You’d think open market competition would drive down rates but it doesn’t seem to be
I’ve never seen something like this before.
3 Keith // Apr 22, 2008 at 6:04 pm
Nicolas, what is your source?
4 NeverStopBuying.com // Apr 22, 2008 at 6:57 pm
Desjardins did it
and all big banks did it after TD cut at 5:06 pm today
5 Michael James // Apr 22, 2008 at 9:37 pm
Nice post. The same topic caught my eye: link
I think the reason why banks haven’t been lowering their rates is because they perceive there to be greater than usual risk in making loans right now. It’s not as bad as in the US, but risks in Canada are higher than usual. I think the spread between the Bank of Canada rate and mortgage rates was going to go up. If the Bank of Canada hadn’t lowered its rate, then mortgage rates (and rates for other types of loans) would have gone up. Minimal competition doesn’t help.
6 Nicolas // Apr 22, 2008 at 10:56 pm
Keith, our good friends at Canadian Mortgage Trends found the article online.
The way I see it, one thing was clear, at least in Quebec: The first one to lower rates will drag all others in. Otherwise the “publicity” would be quite bad for the “bad guys who will not lower their rates”. And as this is a very competitive market, no one would risk such publicity.
And as Desjardins is a major player there, it probably has some kind of leverage against the banks since their rate is the same in the whole country (I woulld hope)
7 Million Dollar Journey // Apr 23, 2008 at 8:42 am
Once one bank lowers their rate to match the rate cut, then the rest will follow.
8 Canadian Capitalist // Apr 23, 2008 at 9:29 am
Here’s a comment from Don Drummond, Chief Economist at the TD Bank in today’s Ottawa Citizen:
“The message is we shouldn’t naively think that it’s an automatic decision. Banks like any other business do face costs of funds and those costs of funds are not behaving in line with what is happening at the Bank of Canada.”
9 Big Cajun Man // Apr 23, 2008 at 9:45 am
Another strong reason to hold your home in a variable rate line of credit? Maybe, but only if you can withstand possible fluctuations too. So far I have been lucky, so far!
–C8j
10 Keith // Apr 23, 2008 at 10:01 am
RBC reacted quicky. Their special offer for ARM has been updated today to prime -.75. The market hasn’t reached this since last summer. ARM has been tightened to prime -.6 overall.
11 Al // Apr 23, 2008 at 1:01 pm
And the interest rate on my saving account will go down again. I’m almost ready to just take it out and stuff my mattress.
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