Big banks keep cuts for themselves

Carney keeps lowering rates, but banks are starting to rebel

Big banks keep cuts for themselves

Every Canadian bank claims to be a “leader.” But the decision by the Big Five not to match the Bank of Canada’s interest rate cut last week—for the second time in recent months—has left angry Canadians fuming that the banks should try following for a change.

The surprise move by Bank of Canada Governor Mark Carney to chop the key lending rate by 75 basis points to 1.5 per cent, the lowest in half a century, was meant to provide a jolt to the increasingly moribund Canadian economy. But in the days after the cut, Canada’s largest banks trimmed their prime rate by just half a percentage point, to 3.5 per cent. It was the same story in October, when the banks refused to match the B of C’s half percentage point cut. In that case, the banks wouldn’t budge until Ottawa offered to take $25 billion worth of mortgages off their hands. (Ottawa has since upped its mortgage purchase program to $75 billion.)

While the banks argue the financial crisis has driven up the cost of borrowing, making it unprofitable for them to match the Bank of Canada’s rate cuts, their moves have riled consumers. More and more, it seems like the rates the banks are borrowing at are going down, while the rates for regular folks hold steady. For instance, while the banks’ prime rate has fallen from six per cent to 3.5 per cent since January 2007, the rate on a five-year closed mortgage has actually gone up slightly from 6.65 per cent to 6.75. Some people have launched Facebook protest pages calling for the banks to get in line. “The public needs a break from the banks,” wrote one. “They make enough money already.”

Paul Beaudry, a professor of economics at the University of British Columbia, says the banks may be right to hold off on rate cuts, if it makes them healthier and more able to lend money over the long run. But, he warns, by doing so they could be undermining the Bank of Canada’s efforts to help the economy. “If the banks are not following the cuts, then the whole aspect of what the Bank of Canada wants, which is to aggressively get people out there spending again, may not work.”

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