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.
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| Source: National Post |
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| 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.
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| 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.
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| Source: Bank of Canada |
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| Source: Trading Economics |
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| 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.
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| Source: Bank of Canada |
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| 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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