Toronto-Dominion Bank was the first of the big banks to decrease its prime lending rate after the Bank of Canada cut its key interest rate cut on Wednesday in response to slower-than-expected economic activity this year.
The lender lowered its prime rate to 2.75 per cent, down a tenth of a percentage point, marking a far shallower reduction than the central bank’s quarter point cut.
When the Bank of Canada cut its key rate in January, also by a quarter point, the big banks were slow in responding to the reduction. They then took a public drubbing over their refusal to follow the central bank in lock-step, lowering their rates by just 0.15 percentage points.
Should other banks follow TD’s lead, they will have lowered their prime rates by a total of 0.25 percentage points this year, or half the Bank of Canada’s total rate reduction of 0.5 percentage points.
However, some observers have pointed out that the Bank of Canada may not mind the muted response from banks.
House prices have soared, raising concerns among central bankers that prices may be overvalued by as much as 30 per cent. As well, Canadian indebtedness has risen to new heights, making consumers vulnerable to rising unemployment levels or an eventual backup in borrowing costs.
For the banks themselves, the response to the Bank of Canada comes as they attempt to shore up profits driven by their lending activities. Since the banks make money by lending at higher rates than their own borrowing costs, substantially lower prime rates can compress their margins.
Source: DAVID BERMAN The Globe and Mail Published Wednesday, Jul. 15, 2015 11:14AM EDT