20 October 2008

Bank of Canada expected to trim rate

The following article is excerpted from the 19 October 2008 edition of the “Toronto Star”.

The Bank of Canada is widely expected to chop its trend-setting nterest rate tomorrow by as much as half a percentage point, a move that would mark the second time in two weeks that policymakers have taken drastic action to lower rates to combat the global financial crisis.

Economists generally agree the central bank must cut rates further to jump-start the Canadian economy amid weakening U.S. economic conditions, falling commodity prices and persistent volatility in financial markets. Yet, some are once again expressing uncertainty about how much of those savings will be passed on to consumers by chartered banks, a simmering controversy that already earned lenders the ire of consumers earlier this month.

The central bank's overnight rate influences the prime lending rates charged by the chartered banks and can affect borrowing costs on a slew of consumer products such as variable-rate mortgages, car loans, lines of credit and student loans. But last time the central bank announced a half-point cut on Oct. 8, not all the chartered banks passed on the full effect to customers….

TD and Canadian Imperial Bank of Commerce were the two banks that declined to fully match a half-point rate cut by the Bank of Canada two weeks ago, citing soaring funding costs. Instead, they hung on to 10 of the 50 basis points amid continuing turmoil in global financial markets. …

"I think the anger of consumers will only be multiplied if there is any attempt by the banks to not pass this on," said Bruce Cran, spokesperson for the Consumers' Association of Canada….

The Bank of Nova Scotia, Bank of Montreal, Royal Bank of Canada and National Bank of Canada all cut their respective prime rates to 4.25 per cent to fully match the Bank of Canada's initial interest rate cut. TD and CIBC only lowered their prime rates to 4.35 per cent.

Derek Holt, a vice-president of Scotia Capital Economics, is among those predicting the Bank of Canada will cut its benchmark rate, now 2.5 per cent, by another half-point tomorrow. Anything less, such as a quarter-point cut, would be "just useless" given the ongoing turmoil gripping financial markets….