The Canadian Press.
Oct. 8, 2008.
TORONTO — Canada's big banks have declined to pass on to consumers the full half percentage point cut in interest rates announced by central banks around the world Wednesday, citing turmoil in raising money in turbulent financial markets.
One of Canada's largest mortgage lenders, TD Canada Trust, was first off the mark, saying it will make a smaller quarter point cut to its prime lending rate, which serves as a benchmark for consumer loans, lines of credit and some mortgages.
CIBC, Royal Bank of Canada, Scotiabank and Bank of Montreal soon followed, saying they would cut their prime by a quarter point as well to 4.5 per cent from 4.75 per cent, effective Thursday.
Earlier Wednesday, the Bank of Canada and other central banks cut interest rates by half a percentage point in a co-ordinated effort to stimulate lending and economic growth.
The central banks had hoped the full half point cut would be passed down to consumers, reducing borrowing costs on home equity and other floating rate loans tied to the prime rate set by the banks, thereby stimulating spending and a boost in economic growth.
In the United States, Bank of America, Wells Fargo and other U.S. banks cut their prime rate by half a point, matching the central bank rate cut
But rocky credit markets appear to have stalled such a move in Canada. Around the world, commercial banks are finding it more difficult to borrow money from other banks and the bond market and are being forced to pay higher interest rates to attract funds and lower the risk for lenders.
The retail arm of TD Bank said the troubles in the global credit markets makes it more expensive for the bank to raise money so it can't pass along the full Bank of Canada rate cut.
"Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions," said Tim Hockey, president and CEO of TD Canada Trust.
"This makes it challenging to match the Bank of Canada rate cut at this time. We recognize the efforts the Bank of Canada is making and, despite the fact that our cost of funds remains high, we have decided to reduce our rate by (a quarter point). We see this as a balanced move in managing our funds and passing along the intended benefits to our customers."
For several years, Canada's big banks have moved their prime rates up or down in lock step with the Bank of Canada's key short-term interest rates. However, a few months ago, they began delaying the prime cuts, citing troubles in financial markets.
Wednesday's cut by the banks appears to decouple many of the rates that affect ordinary consumers borrowing to buy houses, cars or big-ticket items in the broader economy.
And with the banks not matching the central bank cut, it also diminishes the Bank of Canada's policy levers it can use to lower borrowing costs in the economy.
Earlier Wednesday, Finance Minister Jim Flaherty said he wouldn't advise Canada's banking system to decide whether to fully pass Wednesday's interest rate cut onto consumers.
"I don't give the banks guidance on what they should do or shouldn't do," he said.
"They respond to the steps taken by the Bank of Canada as they see fit. We have a competitive banking system."
In a separate commentary, TD Bank economists welcomed the rate cuts by the world's central banks and predicted more rate cuts are on the way.
"Since the start of the year, the forecasts of the various monetary authorities all predicted significant economic improvement in late 2008 and 2009, which we felt was highly unlikely," the bank said in an economic report.
"Moreover, further rate cuts are in the pipeline. We look for the Fed and the Bank of Canada to cut by a further (half percentage point) at their upcoming rate annouincements."
