Brokers question banks’ refusal to match overnight rate

One big bank has offered an explanation for why its prime rate doesn’t match the Bank of Canada’s overnight rate, but brokers aren’t exactly sold.

“For years it was always if the Bank of Canada drops its rate by a quarter point, you’d see prime drop by a quarter point, but I think it really caught everyone by surprise that they actually dropped it because there was talk for the past year that the rate was going to go up and prime was going to increase,” Al Roberts of Dominion Lending Centres The Roberts Group told MortgageBrokerNews.ca.

The Bank of Canada lowered its overnight rate by 25 basis points last week 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.

According to one analyst, the decision not to match the overnight rate was done to ensure a healthy economy.

“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 delay – and the refusal to match the benchmark rate – is viewed by some as a bid to maintain the highest possible profits.

Others, however, think it’s a subtle push-back by the banks that were caught off guard by a central bank that unexpectedly slashed its rate – a move that caught many, including most Canadian economists, off guard.

“On the one hand they’re milking (clients) on the other hand they have never seen this situation before; they were caught by surprise by the bank lowering its rate and them refusing to match it could be a case of the banks pushing back a bit,” Micheal Kafenzakis of Verico Groupe Conseil Hypotheque told MortgageBrokerNews.ca. “In my forty years of experience, usually when the government drops their rate the banks follow. I suspect in the months ahead, they’ll come around and bring their rates down (to match the Bank of Canada rate). Otherwise they’re just gouging.”

Justin da Rosa