The stalemate between Canada’s banks and the standard set by the Bank of Canada has ended; the “Big 5” have finally responded to last week’s Overnight Lending Rate cut by lowering their Prime rates to 2.85 per cent, effective today.
Royal Bank of Canada was the first to announce they would implement the discount, releasing the news at 3:50 p.m. on Tuesday. By 6:21 p.m., all the other banks had followed suit – including TD, which famously stated early on that they would not be altering their prime rate in response to the announcement.
And it’s about time – while the banks in the past have followed the BoC’s lead within hours or minutes, it took a full week for them to pass the savings down to their variable borrowing customers (though it took less than 24 hours for RBC and TD to slash their savings rates). The banks’ slow start frustrated customers and drew criticism that they were failing to aid in the BoC’s efforts to stimulate the economy with lower rates. Globe and Mail columnist Rob Carrick called out the banks for “failing the ethics test”, pointing out that the very nature of variable rate products is to correlate directly to Prime, and that by not passing on a discount, the banks “reneged on a deal”.
Protecting Bank Profits
However, the banks have still come up short by only cutting Prime by only 15 basis points – still 10 below the full quarter percentage discount set by the BoC. Speculation remains that they’re waiting for possible further reductions to the Overnight Lending Rate in the BoC’s announcements to come. Others have stated that implementing only part of the discount is an effort to protect their profit margins – with rates already extremely low, there isn’t much room for the banks to cut them further. We’ll have to wait and see whether the Bank of Canada has more cuts up its sleeve, and how lenders will react.
Fixed Rates Make Headlines
Fixed mortgage rate pricing is not directly impacted by the Overnight Lending Rate cut as they are set by the direction of government of Canada bond yields. However, bond investors have reacted to the BoC’s announcement by driving yields to record lows – as of today, 5-year bonds offer a coupon of 0.759 per cent – a 30 basis-point slide from one week ago. That sets the stage for fixed rate discounting.
RBC and TD were the first to roll out cuts, with RBC slashing their 5-year fixed rate 10 points to 4.84 per cent, and TD from 3.29 to 3.09 per cent respectively.
The Phantom 5-Year?
However, RBC made an even bigger splash with reports that they were offering a special 5-year fixed rate of 2.84 per cent – and we certainly fielded our fair share of questions from curious borrowers! Upon press time, however, this is not an official rate offered by RBC, and is instead an estimate as to how the lender may price its “discretionary rates” (for the most pristine of borrowers), based on precedent set by past discounting factors. Set 200 basis points from RBC’s actual posted rate, a theoretical successful applicant would need the full package of credit, assets and collateral. However, keep in mind that’s big bank pricing – the most competitive lenders and brokers on the market have been offering pricing below the three per cent threshold for some time now.
Patience Expected for U.S. Economy
The U.S. Federal Reserve’s monetary policy is up next, with its latest policy meeting to commence this afternoon. Strong and steady recovery there has had economists calling for their own central rates to rise – it’s the next logical step given their bond buying program has wrapped, and housing and employment are on the rise. But the U.S. isn’t immune to the effects of low oil prices, which have in turned strengthened the U.S. dollar and weakened inflation. Those factors have prompted expectation that rates won’t rise there until late 2015, or even 2016… sound familiar?
Update: The U.S. Federal Reserve has left interest rates unchanged at 0 – 0.25 per cent, stating “it can be patient” in reigning in economic stimulus measures.