Canadian banks’ rebellion (as the Globe puts it) is deadening the stimulus effect of yesterday’s Bank of Canada’s rate cut. If the BoC’s 0.50% cut doesn’t loosen up Canadian lending soon, there’s speculation the BoC may lower again on October 21.
Merrill Lynch economist David Wolf says Canada’s “monetary policy setting is no more accommodative now than it was (before) despite overnight rates being 50 basis points lower.”
With some economists now forecasting a Canadian recession (that’s debatable) and less inflation, the BoC arguably has room for a follow-up rate cut. But things may have to remain dire for another two weeks for the Bank to move again so soon.
Side Bar: Yesterday the prime-BA spread (a rough indicator of lenders’ variable-rate margins) was 1.25%. That’s exceedingly low by historical standards. Had banks followed the Bank of Canada today and lowered prime by 1/2%, the prime-BA spread would have shrunk another 12% to 1.10. Don’t cry too hard, but some banks would be making little, if any, money at a 1.10 spread. In some cases, lenders are eliminating variable-rate mortgages altogether. Yesterday, Macquarie Financial was the latest lender to halt them.
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