Richard’s comments: Hopefully BoC has enough influence over the Big Banks that we see a reduction in Prime. A drop in prime will help maintain, and possibly increase the value of homes in the Waterloo Region. If this happens, keep your payments the same to ensure you are paying off your mortgage quickly and staying ahead of the game. This will protect you if rates start to edge up and increase your equity in your home.
Barbara Shecter and Garry Marr
Friday, Jan. 23, 2015
Federal finance minister Joe Oliver said Friday he won’t interfere if Canada’s top financial institutions decline to fall in line with this week’s surprise overnight interest rate cut by the Bank of Canada.
But longtime bankers and Finance department officials say it would not be unusual for the central bank to meet with officials at the country’s banks to find out why they haven’t followed suit and lowered their prime lending rates.
The “whole point [of the cut from 1% to 0.75%] was for the banks to follow suit [and] stimulate spending. If they don’t, then the Bank cut the rate for nothing,” a former Finance official who now advises banks told the Financial Post.
A veteran senior banker said it “would not be unusual for the BoC to have discussions with the major banks,” adding that the likely topic would be the prime rate, a key lending rate that influences others including variable mortgages, rather than mortgage rates themselves.
But “anything is possible,” he said.
The Bank of Canada’s policy is “not to comment on any of our dealings with specific financial institutions,” a spokesperson told the Financial Post in an emailed statement Friday.
In April of 2009, the last time overnight interest rates were trimmed by the Bank of Canada, the cut was matched within minutes. In late 2008, though, when the rate was slashed by 75 basis points, Toronto-Dominion Bank, Royal Bank of Canada, Bank of Montreal, and Canadian Imperial Bank of Commerce passed on only a 50 basis point cut to their customers.
On Friday, Mr. Oliver issued a statement saying he won’t intervene to influence what the banks do this time around.
“I do not intend to interfere with the day-to-day operations of the banks,” Mr. Oliver said, adding that he has “no current plans to introduce new rules regarding residential mortgages.”
Though it is rare, the federal Finance Department has intervened when it is unhappy with the handling of mortgage rates at the banks; however, it has done so when policymakers wanted to avoid rates dropping too low and potentially feeding a real estate bubble.
In the spring of 2013, for example, then finance minister Jim Flaherty urged the banks not to roll back rates after Bank of Montreal cut its fixed five-year mortgage rate to a shade under 3%.
Manulife Bank made a similar cut but later issued a statement saying the lender had reverted to its previous posted rate of 3.09% “after consulting with the Department of Finance.”
With or without urging from the Bank of Canada or the Finance Department, it is far from conclusive that the banks won’t budge this time.
Dave McKay, the chief executive of Royal Bank of Canada, told the Financial Post in an interview Thursday that he was surprised by the rate cut and that it was “premature” to comment on the impact on the bank.
“It’s caught so many people off guard. We weren’t expecting this,” Mr. McKay said. “I think all the banks are sitting back and saying, ‘Wow, we’ve got to think about this.’ So it’s tough making plans going forward.”
He said understanding the Bank of Canada’s views on the economy is a key consideration.
“The economy seems to be obviously unstable if that’s what the Governor is saying. We need to kind of understand why he felt this way. What’s underlying it is important,” Mr. McKay said.
Toronto-Dominion Bank issued a statement on Friday that made reference to both the “unexpected” nature of the rate cut and the fact that TD operates in a competitive environment, which could be read to mean the bank is simply waiting for competitors to act.
“Our decision not to change our prime rate at this time was carefully considered and is based on a number of factors, with the Bank of Canada’s overnight rate only being one of them,” TD said. “Not only do we operate in a competitive environment, but our Prime rate is influenced by the broader economic environment, and its impact on credit.”
If banks don’t come to the conclusion that they need to cut their lending rates, observers say the Bank of Canada may act again and slash overnight interest rates further.
“I think what you might see, if the banks don’t pass on this cut, is the Bank of Canada will just lower rates again in the spring to force them to do it,” said one banking source.
That view was backed up by research published Friday by Bank of America Merrill Lynch, which noted that the prime lending rate at banks typically moves “in lockstep” with Bank of Canada adjustments.
“In our view, if banks fail to lower the prime rate, [Bank of Canada Governor Stephen] Poloz may be tempted to respond with another dose of policy easing,” economist Emanuella Enenajor wrote in the report.