Monday, January 26, 2015

Canadian Banks Hesitate to Follow the Bank of Canada's Rate Cut

The Bank of Canada surprised markets last week when they lowered the overnight rate 0.75% on Wednesday. The bank cited low oil prices, which have rendered much of Canada's oil production unprofitable and resulted in downward pressure on growth and inflation expectations.

Source: National Post

Source: Bank of Canada
As we discussed last month, this relief was much needed to reverse these trends and support Canada’s faltering housing market.

Source: The Canadian Real Estate Association

Some are raising concerns that the Bank of Canada focused too narrowly on oil production by ignoring recent growth in manufacturing, stable employment, and potential adverse effects of increased lending amid high household debt levels.

Source: Bank of Canada

Source: Trading Economics

Source: FRED
Canada’s "Big Five" banks seemed to agree and did not lower prime lending rates following Wednesday's announcement.
Financial Post: 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. 
Their decision undermines the Bank of Canada's main transmission mechanism by not providing lower rates to consumers and businesses. Federal Finance Minister, Joe Oliver, says the Bank of Canada won’t intervene, so we will just have to wait and see if the Big Five come around to lowering rates themselves. In the meantime, Wednesday's announcement further weakened the Canadian Dollar, which will boost exports.

Source: Bank of Canada
Source: Bank of Canada
The Big Five's decision may be all the better for Canada: exporters benefit from a weaker Canadian Dollar, while inaction in bank prime rates prevents potential overheating in real estate and credit markets.

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