Big banks may not follow Bank of Canada
Canada’s big banks may resist the urge to pass on to borrowers the full benefit if the Bank of Canada decides to reduce its key interest rate on Wednesday, a reluctance that could anger borrowers.
CIBC analyst Robert Sedran suggested a 25-basis-point cut in the central bank’s overnight rate could be followed by only a 10basis-point reduction in the prime rate by the big banks.
“Either way, we would not expect an overnight rate cut to be met with a full reduction in bank prime rates,’’ Sedran wrote in a report Tuesday on the eve of the Bank of Canada announcement that is hotly anticipated this time around amid concerns the economy is in a recession.
If the Bank of Canada cuts interest rates, it will be an effort to jumpstart the economy by making it cheaper for consumers and companies to borrow money.
But a cut by the central bank won’t automatically trigger a similar cut in the prime rate at the country’s big banks. That rate is currently standing at 2.85 per cent.
Moves in the prime rate affect variable rate mortgages as well as home equity lines of credit and other variable-rate forms of borrowing.
When the Bank of Canada unexpectedly cut the rate in January by a quarter of a percentage point, the big banks cut their prime rates by 0.15 -- but only after a week of hand-wringing about what to do.
Mortgage broker Frank Napolitano said if the banks don’t pass on the full amount in the event that the Bank of Canada once again opts to cut its key interest rate, they will face the wrath of angry borrowers.
“With the pressure that was put on them in January, they have to give back the quarter point, they have to follow suit,’’ said Napolitano, managing partner at Mortgage Brokers Ottawa.
“I don’t know that there is going to be as much leniency this time around from consumers.’’