One big bank has offered an explanation for why its prime rate doesn’t match the Bank of Canada’s overnight rate, but brokers aren’t exactly sold.

“For years it was always if the Bank of Canada drops its rate by a quarter point, you’d see prime drop by a quarter point, but I think it really caught everyone by surprise that they actually dropped it because there was talk for the past year that the rate was going to go up and prime was going to increase,” Al Roberts of Dominion Lending Centres The Roberts Group told MortgageBrokerNews.ca.

The Bank of Canada lowered its overnight rate by 25 basis points last week and the banks have all lowered their prime rates by 15 basis points. It took the banks almost a week after the central bank lowered its overnight rate to slash their own prime rates.

According to one analyst, the decision not to match the overnight rate was done to ensure a healthy economy.

“The absence of a full prime cut slows the stimulus into the housing market late in the cycle while the negative impact on Canadian bank profitability is dulled by the fact that it is only a partial move,” Robert Sedran, analyst at CIBC World Markets said in a note to clients, according to the Financial Post. “We’ll see if this balance holds or if another cut in the overnight rate is coming.”

The delay – and the refusal to match the benchmark rate – is viewed by some as a bid to maintain the highest possible profits.

Others, however, think it’s a subtle push-back by the banks that were caught off guard by a central bank that unexpectedly slashed its rate – a move that caught many, including most Canadian economists, off guard.

“On the one hand they’re milking (clients) on the other hand they have never seen this situation before; they were caught by surprise by the bank lowering its rate and them refusing to match it could be a case of the banks pushing back a bit,” Micheal Kafenzakis of Verico Groupe Conseil Hypotheque told MortgageBrokerNews.ca. “In my forty years of experience, usually when the government drops their rate the banks follow. I suspect in the months ahead, they’ll come around and bring their rates down (to match the Bank of Canada rate). Otherwise they’re just gouging.”

Finance Minister Joe Oliver has said he will not interfere with the housing market – or force banks to lower their interest rates, despite the Bank of Canada’s announced rate cut.

“I do not intend to interfere with the day-to-day operations of the banks,” Oliver said in an e-mailed statement Thursday, according to BNN. “I have no current plans to introduce new rules regarding residential mortgages.”

It appears that at least one big bank is holding off on cutting its prime rate and — with Oliver stating he won’t force the banks to do so — the other big banks may follow suit.

“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,” said Alicia Johnston, a spokeswoman for TD, told CBC News.

Oliver has taken a soft line when it comes to mortgage rates and the housing market since taking office.

This past June, he responded to critics calling for more active participation from the government in reining in the housing market.

“I don’t think it’s the role of government to set interest rates or rates for mortgages,” Oliver said on Business News Network. “The rates are quite low and they’ve been coming down but a very small amount.”

Oliver expounded on his position by noting that CMHC has forecasted a soft landing and that the government will continue to monitor the market while also reducing the level of influence it will have going forward.

“We don’t believe that there’s a major problem at this point,” he said.

Source: MortgageBrokerNews.ca                           

If you ever have any questions about the mortgage industry or about your mortgage, refinance, etc. please get in touch with me.

John Dunford
jdunford@dominionlending.ca
514-949-5434

The Bank of Canada lowers interest rates and mortgages get cheaper, right? Not necessarily. Yesterday customers of TD Bank were told that there would be no rate cut for now as the bank bases those decisions on “a number of factors”. The other major banks have said that no decision has been made yet but that they are assessing the situation. Rates are already low of course and with banks under increasing pressure from regulation and the squeeze on profits from the low oil price they may not be too keen to pass on savings unless they have to. Experts say that the market will decide and certainly if one lender breaks ranks and cuts the cost of its home loans others will likely follow. Historically the banks have followed a BoC rate change but then the current economic conditions are not typical.

If you ever have any questions about the mortgage industry or about your mortgage, refinance, etc. please get in touch with me.

John Dunford
jdunford@dominionlending.ca
514-949-5434