Today’s Bank of Canada rate decision is being watched very carefully. Not because of any lingering doubts about what they will do; because according to the rate futures there is a 100% expectancy of a 50 basis point cut (and a 73% chance of a 75 basis point cut).
The question on everyone’s mind is what will the six big Canadian banks do?
The last rate cut decision by the Bank of Canada resulted in a huge public relations mess for the Canadian banks because they refused to pass on the full rate cut to their customers. While the central bank lowered Canadian rates on December 9th, 2008 by 75 basis points, the banks grudgingly lowered their prime rates by only half a percentage point.
They have also refused to lower mortgage rates, citing “extraordinary credit market conditions”. This in spite of the fact that all stress measures of the credit market as well as money “costs” have fallen tremendously.
For example, the Banker’s Acceptance rate is now hovering around 1%. The 5 year bond rates are around 1.58% and the 30 year at 3.6%. Compare that to 5 year mortgage rates of approximately 6.75%-6.50% and you notice that that is a huge gap. In fact, according to historical data, Canadians have never seen such a discrepancy in their financial markets.
If the banks refuse to lower their prime rate again, the Canadian banks will not only widen the gap between the central bank rate and the “real rate” available to people but they will also negate any influence which the central bank is trying to have on the Canadian economy. In the end, by their belligerence, they could be pushing Canada into a deeper and longer recession than it would otherwise have to endure.
In that case, it would be a good idea for the usually soft-spoken governor of the Bank of Canada, Mark Carney, to call a meeting with the head of all Canadian banks and throw some chairs around.
Here’s a chart showing historical central bank rates for 7 major countries (Canada, US, ECB, Japan, England, Australia and Sweden).
The Bank of Canada lowered its overnight benchmark rate by half a percentage point as expected. All Canadian banks followed by lowering their prime rate by the same amount to 3%, which means they are still 25 basis points behind the central bank’s lowering agenda.
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