Borrowers got what they were asking for. It just wasn’t as big as they were asking for.
The major banks cut their prime rates by just 15 basis points today, to 2.85%. It’s the first time ever that Canada’s official bank prime will have changed by less than ¼% (at least back to 1935 when the Bank of Canada started publishing this data).
This all comes after TD Canada Trust worried borrowers last week, telling them it wouldn’t cut prime rate at that time.
In a statement, RBC characterized its unorthodox 15 bps cut by saying:
“We believe our announcement is a balanced approach which reflects our actual cost of funds and helps clients save money on products such as variable-rate mortgages, lines of credit and floating-rate loans…Our decision was driven by a number of factors, including our wholesale funding costs, the competitive, operating and macroeconomic environments, and the Bank of Canada’s recent rate decision and its impact on other market rates across the yield curve.”
Some other rate observations of note:
Last time the BoC cut its overnight rate banks followed suit within 60 seconds. This time it took six days. Anyone notice?
This isn’t the first time an individual bank has dropped prime by less than a quarter point. TD Canada Trust and CIBC did it in October 2008, but none of the other Big 6 followed suit, so Canada’s prime rate officially fell by 25 bps. (TD and CIBC later gave back that 10 bps by lowering their prime to 4.00% just 11 days later.)
The 5-year bond yield, which leads fixed mortgage rates, closed at another record low today: 0.76%. If this level were to hold, the theoretical “fair value” for a deep discount 5-year fixed rate would be in the 2.25% neighbourhood.
TD’s 3.09% is the lowest widely advertised five-year fixed rate of any major bank. Yet, TD was at 2.99% back in June 2014 when the 5-year yield was 80 bps higher. (Don’t try to figure that out. It’s the new math of the mortgage market.)
Markets are now pricing in a 61% chance of another rate cut in March. (Source: Bloomberg)
The Bank of Canada reminded everyone of how banks actually work, telling Bloomberg: “Financial institutions set their prime rates based on a number of factors, including the cost of short-term funds and competitive pressures…It is up to the management of these institutions to decide what to charge their customers.”
Here’s what the Department of Finance (a Department of few words) had to say about the banks’ moves on prime: “That is a decision for the banks to make.” (via The Globe and Mail).