Analyst explains why banks haven’t matched the BoC’s rate

Analyst explains why banks haven’t matched the BoC’s rate

Analyst explains why banks haven’t matched the BoC’s rate The big banks’ decision to lower their prime rates – but not fully match the mark set by the Bank of Canada – was about balancing the economy, according to one bank analyst.

“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 Bank of Canada lowered its overnight rate by 25 basis points 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.

Some may question whether the refusal to lower its rates further isn’t simply about maximizing profit. Before the respective moves, many brokers weren’t surprised by the lack of action.

“I’m not surprised the banks haven’t dropped their variable rates. They want every last dollar they can get,” Rob Campbell told earlier this week, before the banks lowered their prime rates. “At the end of the day it’s costing them less money to borrow and at the end of the day they have shareholders to answer to.”

Still, Sedran says the decision to not match the BoC’s rate is a “compromise”.

“Perhaps we have arrived at a compromise,” he said. “The rate cut was behind the currency depreciation that should prove stimulative to economic activity and the partial move in prime is a marginal positive as well.”
  • Vince Gaetano 2015-01-29 12:01:42 PM
    There would be validity to this explanation IF the banks didn't drop rates by 25 bps on the savings side of the product sheet. This is simply a profit play by the banks and don't let anyone fool you into believing its not.
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  • Jeff 2015-01-29 12:40:50 PM
    I may be wrong here, bhen prime starts rising again, I doubt the banks will only partially raise the Prime rate. This is likely to be a permanent increase in the spread between the overnight rate and Prime, which will lead to permanent increased profits for the banks.
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  • Layth Matthews 2015-01-29 2:34:23 PM
    I think the Canadian Banks' hesitation to match the BOC's rate drop is strange and embarrassing for all concerned.

    Right or wrong, this rate cut was a preventive policy move to protect the Canadian economy. It is stimulative for consumers and businesses across the country - not least of which, the Canadian Banks!

    For them to resist matching the BOC rate drop both mutes and delays the effectiveness of this bold policy move, and appears to pad their profit margins - but in a very short-sighted way.

    Are they just being cautious because the banking system is in trouble? :)

    Withholding the full rate cut undermines the BOC, the whole Canadian economy, and ironically, the outlook for future bank performance along with it.
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