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

by Justin da Rosa | Mortgage Broker News | January 29, 2015

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 MortgageBrokerNews.ca 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.”

http://www.mortgagebrokernews.ca/news/analyst-explains-why-banks-havent-matched-the-bocs-rate-187623.aspx