What to expect from banks when rates rise

What to expect from banks when rates rise

What to expect from banks when rates rise Brokers should expect the banks to match an eventual rate hike – something they have failed to do when rates have gone in the opposite direction.

“They will go up the full amount; their margins are really squeezed right now so when rates go in the opposite direction they will take advantage of it,” Dr. Sherry Cooper, chief economist with Dominion Lending Centres told MortgageBrokerNews.ca. “It obviously will depend on everything else that’s going on at the time but I think they all will collude to make sure they can increase their margins.”

The Bank of Canada has lowered its rates twice this year now, with the first 0.25 per cent cut made in January. Lenders followed with a 0.15 per cut of their own.

And Cooper doesn’t believe the same logic will apply when rates tick up, as tight margins will force the big banks to try to squeeze as much profit as possible.

On Wednesday, the central bank made a further 0.25 per cent cut that was quickly followed by TD Bank, which cut its prime rate by 10 basis points.

The move has some questioning the efficacy of the decision.

“The question in my mind is the effectiveness of a rate cut at this time. The follow-through at the financial institutions will likely be partial, as it was with the last rate cut in January,” Cooper wrote in an economic statement. “The prime rate and mortgage rates are likely to fall by no more than 10 to 15 basis points from already very low levels. At the margin, this might boost housing and consumer credit a bit, but these are not the sectors most in need of stimulus.”