Bank of Canada Cuts Rate 1/4%

Lower-Interest-rates It was less than some expected and more than others expected.  The Bank of Canada lowered its key lending rate 0.25%.

The BoC factored a host of variables into its decision: a contracting economy, a “global financial crisis,” declining commodity prices, and a depreciating Canadian dollar.

In its statement this morning, the BoC expressed concern that Canada’s tight credit markets will “restrain business and housing investment.”  It also expects that “further monetary stimulus will likely be required to achieve the 2 per cent inflation target.”  (i.e.  another rate cut)

Now the ball is in the banks’ court.  Variable-rate borrowers are watching and waiting to see if Canadian banks follow the BoC’s lead and lower their prime rate 1/4%.  As you may recall, when the BoC cut rates Oct. 8 the Banks didn’t initially match the cut.

On a positive note, the Bank of Canada suggests we might avoid a recession this year and next.  By 2010 it’s even forecasting a solid economic recovery with 3.4% GDP growth.

The BoC has now cut rates 2.25% since last December.  Its next rate meeting is December 9.

Canada’s 5-year bond yield is down to 2.83%.

  1. I hope First National will lower there prime rate. With all the interest rate cuts, I could be saving an extra $100.00 a month on my Mortgage.

  2. Some non bank lenders are having a harder time getting funds. That is making their mortgages more expensive to close, which in turn makes then more hesitant to lower their prime rates.

  3. Sure, but what I don’t understand is why they don’t just increase their spread over prime to affect the pricing on the new mortgages. This makes more sense if they are worried about their cost of funds for new mortgages.
    On existing mortgages, where they’ve already lent the money and probably sold the mortgage, I see no reason why prime shouldn’t be lowered.

  4. hmm ok guess CIBC at 4.35 isn’t as bad. I do however think prime should match at all banks! When I compared mortgages back then they did………….that’s how I picked my deal.
    My mortgage for the 5 years before that wasn’t such a deal and they did just fine and made a fair amount more money off me!
    If someone locks in a deal, it should be what it is, sometimes you win, sometimes you lose.

  5. The caution and prudence that our banks are exhibiting, while not to everyone’s liking, is the very reason we are one of the few countries in the world that are not experiencing a financial meltdown.
    Like everyone else I wanted the lowest rate available but I commend the banks for not bowing to public pressure and being pressured into making poor bottom line decisions.
    The government needs to announce there plan to guarantee inter banking loans before we will see the banks follow the BofC drops 100%

  6. JSF….
    Variable mortgages are funded with short-term money, which means the bank has to fund their pool of variable mortgages continually….If the prime – BA spread worsens, it directly affects the bottom line on ALL variable mortgages on the books, not just the new ones.
    Also, keep in mind how many line of credits (both secured and unsecured) as well as loans are tied to a bank’s prime.
    They have good reason not to want to adjust their prime, but I still think it sucks.

  7. “Variable mortgages are funded with short-term money, which means the bank has to fund their pool of variable mortgages continually.”
    Thanks Whistler. Although I can’t say that I understand this. How exactly do they need to continually fund my variable rate mortgage? I assume that they borrowed short term money to fund the purchase of my house. After that I’m a bit fuzzy…..

  8. JSF,
    Your comment is correct in that they borrowed short term funds to lend to you for your variable rate mtg. Basically, they are borrowing at a variable rate, but their variable rate has been going up due to credit crunch, causing them to lose money on them (or just not make as much as they’d like).

  9. The banks made stupid bets with variable product. Instead of paying for their imprudence they are using their customers to bail themselves out of their mess.
    The banks made an implicit guarantee to change their prime rate in relation to the rate set by Canada. However they were very careful to ensure they never made the actual promise to do so.
    Customers bought variable product because they believed that it would vary with the rate set by the government.
    The cost of this problem should come out of the banks equity not borrowers pockets.
    Based on Basel requirements banks must hold capital reserves for the various risks that they are exposed too. Interest rate risk due to de-correlation of CDOR and Canada’s overnight lending rate should have been provisioned for.
    They have the capital reserves to offset this risk and if they don’t then they fraudulently understated the risk to OSFI.

  10. Cmon guys. Banks are just a business. They don’t owe anything to anyone. If you had a lemonade stand and lemons jumped to $5 each would you charge customers $2 for a glass of lemonade? Think like capitalists and buy some stock if you’re not happy about all the money they’re making.

  11. Check your variable rate mortgage agreement wording. Mine says “This will change with OUR Mortgage Prime Rate”. That means instead of dropping 3/4% I expect mine will increase the 1% that my bank has raised THEIR mortgage prime rate. I bet all the banks have the same wording in their agreements because i checked a few of their websites and they all use that wording with their posted rates.
    Crooks.

  12. MM: I think you are confusing yourself. What you are thinking about is their new “Variable Mortgage” rate (Prime + 1) offer. It certainly is NOT the same as Prime rate. If your contract is Prime minus whatever, then you are in a good shape. I would drop 3/4% – I know mine did.

  13. Amazing. Consumers run to ING at 3% variable and expect to have their variable mortgage at 4% (or lesst) at their local FI. It’s just never enough. As previously stated, Banks are businesses and have to reflect the cost of funds in their loan offerings. Consumers seem to expect them to operate without covering their costs and make some profit – like every other business. Ridiculous.

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