Bank Prime Rate Cuts Fail to Match Bank of Canada’s

THINK OUTSIDE THE BOX:  Although the banks did not match the Bank of Canada’s 25 basis point (1/4%) decrease, they have decreased their prime lending rate by 15 basis points (.15%).  Prime rate is now at 2.85% versus 3%.

(Bloomberg) — Canada’s six biggest banks cut their prime lending rates 15 basis points to 2.85 percent, failing to fully match a rate reduction by the nation’s central bank six days earlier.

Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and National Bank of Canada made the first change to their prime rates, which set borrowing levels on everything from variable mortgages to credit lines, since September 2010, according to data compiled by Bloomberg.

The Bank of Canada reduced its trend-setting overnight lending rate 25 basis points to 0.75 percent on Jan. 21, saying a plunge in oil prices would reduce growth and inflation. The commercial banks typically move prime rates in tandem with the central bank though a slide in market interest rates has raised concerns about margin erosion.

“People were up in arms about the banks not cutting prime rate and the banks saw this as an opportunity to retain margin and threw us a bone,” Robert McLister, who has a mortgage brokerage and runs rate search engine RateSpy.com “On mortgage books that are in the tens of billions, that 10 basis points adds up.”

Wide Margin

There have been exceptions to the general rule of banks following the Bank of Canada. In December 2008, the Bank of Canada cut its overnight rate 75 basis points to 1.5 percent while the six large lenders cut their prime 50 basis points to 3.5 percent, creating a 2 percentage point margin between the two rates.

If today’s gap of 2.1 percentage point persists it would be the highest on a consistent basis since the Bank of Canada started shifting to the overnight rate as its target in 1994, according to Bloomberg data.

“We believe our announcement is a balanced approach which reflects our actual cost of funds and helps clients save money on products such as variable-rate mortgages, lines of credit and floating-rate loans,” Wojtek Dabrowski, a spokesman for Royal Bank, said in an e-mailed statement.

“Financial institutions set their prime rates based on a number of factors, including the cost of short-term funds and competitive pressures, Louise Egan, a Bank of Canada spokeswoman, said in an e-mailed statement. ‘‘It is up to the management of these institutions to decide what to charge their customers.’’

The prime rate cuts will telegraph a message to consumers that borrowing costs are lower and they can borrow more, John Clinkard, chief economist at Deutsche Bank Canada, said by phone from Toronto. From the Bank of Canada ‘‘this was the message: to increase the stimulus in the system. The fact that the banks also lowered mortgage rates will be positive for housing.’’

 (Bloomberg)   2:12 PM MST   January 27, 2015

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