January 23, 2015
Gena Smith Belanger
Katia Dmitrieva and Doug Alexander, Bloomberg News | January 23, 2015 | Last Updated: Jan 23 2:16 PM E
The Bank of Canada’s bid to stimulate a sluggish economy with a surprise rate cut is getting no help from the nation’s big banks.
By this time next week, Canadians borrowing for a home might be looking at the lowest rates in the country’s history as a result of the Bank of Canada’s rate cut.
Toronto-Dominion Bank, Canada’s largest lender, says it has no plans to cut its prime rate to match the central bank’s move, keeping the rate linked to variable mortgages, car loans and other securities, at 3%. Other banks, including Royal Bank of Canada, are also holding off.
“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,” spokesman Mohammed Nakhooda said in an e-mail statement.
The Bank of Canada unexpectedly lowered its overnight lending rate a quarter of a percentage point to 0.75% Wednesday as a plunge in the price of oil dims the outlook for the economy. Prime rates have traditionally moved in lock-step with the central bank’s benchmark level, though there’s been departures in the past.
“The question becomes: Is this going to raise the ire of the Bank of Canada or the government?” John Aiken, analyst at Barclays Plc, said in an interview Thursday. “If you’re doing this to stimulate the economy and it doesn’t flow through into the lending rates, then it does not have the same impact as what was intended.”
Canada’s big five banks last cut their prime rate in April 2009, when they cut to 2.25% from 2.5%, Bloomberg data show.
A spokesman for the Bank of Montreal declined to comment on whether the bank would move its prime rate and a Canadian Imperial Bank of Commerce spokesman didn’t respond to a request for comment. Andrew Chornenky, a spokesman for Bank of Nova Scotia said the bank will make an announcement “if there are any changes to report.”
“I, like the others, were completely caught off guard Thursday,” Royal Bank of Canada Chief Executive Officer David McKay said in an interview. “I need to catch up with my team and digest what’s going on in the market and figure out what we’re going to do from here.”
The country’s banks loaned about 74% of total Canadian mortgages, according to the Bank of Canada’s data for the second quarter of 2013.
“The BOC was prompted to cut rates in order to improve the affordability of existing — very high — consumer debt loads as unemployment rises and as incomes stagnate,” Gabriel Dechaine, an analyst at Canaccord Genuity in Toronto, said in a note to clients. “In turn, we believe there will be regulatory pressure on the banks to cut their lending rates,” he said referring to the Bank of Canada and Department of Finance.
The Bank of Canada rate cut comes just months away from the start of the key spring market when activity typically jumps. Home prices have been rallying for at least the last decade in Canada’s largest cities. The average price of a house in Vancouver rose 67% since January 2005 to $638,500 in December. Toronto prices jumped 71% in the same period to $521,300, according to the Canadian Real Estate Association.
Meanwhile, Federal Finance Minister Joe Oliver says he has no intention of pushing Canadian banks to follow the Bank of Canada’s lead and drop their rates.
For his part, Oliver says he won’t interfere with internal decisions of commercial banks.
He also says he has no current plans to introduce new rules for residential mortgages.
Oliver’s approach differs from that of his predecessor, Jim Flaherty, who called the Bank of Montreal in 2013 to express his disapproval of its decision to offer a special low rate.
“I do not intend to interfere with the day-to-day operations of the banks,” Oliver said in a statement Friday.
Five-year variable mortgage rates, which are tied to prime, are at 2.4% for the major banks, according to RateSpy.com, a mortgage rate search engine run by Robert McLister, who also has a mortgage brokerage. He thinks they could go below 2%.
“We haven’t seen that for a while,” McLister said by phone. “You’re going to see fixed rates under 2 1/2%, which has never happened. It’s going to certainly heat up the housing market more.”
Big 5 banks have a discretionary rate on five-year fixed term mortgages at 2.89%, according to the website. Five-year fixed rates currently average 4.79%, according to data compiled by Bloomberg.
The bank’s prime rates haven’t always moved in tandem with the central bank rate. In December 2008, the country’s lenders failed to immediately match the central bank’s cut. CIBC, Bank of Montreal, Royal Bank of Canada, Scotiabank, Toronto-Dominion Bank and National Bank of Canada all cut their prime rates by 50 basis points to 3.5%. That was less than the three- quarters of point rate cut from the Bank of Canada to 1.5%.