Big banks may not fol­low Bank of Canada

Cape Breton Post - - CLASSIFIEDS / BUSINESS -

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.’’

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