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.”
  • Ernie MacDonald 2015-07-16 10:40:31 AM
    Why is no one talking about the fact that the Bank of Canada has cut it overnight rate by 50 bps in 2015, and the banks and mortgage lenders have only passed on 30 bps to the clients. Am I the only one that is mad about this!!! The BOC dropped the over night rate to help boost the economy, and the banking industry as a whole has kept 40% of it for them selves. Last time I looked the banks weren't hurting, but the economy is. A little backlash and bad press may get the banks to pass on the entire 25 bp drop the their clients. Lets get talking about this!!!!
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  • CJ 2015-07-16 11:17:00 AM
    Ernie, have you considered that somebody perhaps grew a spine . . . finally.
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  • CJ 2015-07-16 11:37:39 AM
    If you are desperate thou and your mortgage is variable, perhaps you should consider selling before this ship of fools sinks. Here are some clues, if you will. US/CDN bond market is 97% interlaced. This will only work for you if you put patriotism on a side for awhile thou.

    BoC - July 15, 2015
    The lower outlook for Canadian growth has increased the downside risks to inflation. While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.

    Bloomberg - July 15, 2015
    Federal Reserve chair Janet Yellen said prospects are good for further improvements in the labour market and the economy, keeping the central bank on track for an interest rate increase in 2015. “If the economy evolves as we expect, economic conditions would likely make it appropriate at some point this year to raise to raise the federal funds rate target,” Yellen said in testimony prepared for delivery before the House Financial Services Committee in Washington.
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