9 October 2008

Banks trim prime but lag BoC cut

The following is excerpted from the 8 October 2008 edition of the “globeandmail.com”.

Major Canadian banks said they would lower their prime rates by just a quarter of a percentage point, refusing to pass along all of the Bank of Canada's half-point decline.

The rebellious move is a departure from the past, when the big banks have fully matched central bank rate cuts, despite complaints they couldn't really afford it.

The first move was made by Toronto-Dominion Bank, cutting the prime rate to 4.5 per cent, effective Thursday – a tepid measure that amounts to thumbing its nose at the central banks. It was followed by other major banks.

“Like all financial institutions, we have been watching the key lending rates very closely. Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions,” said Tim Hockey, president and chief executive officer of TD Canada Trust.

“This makes it challenging to match the Bank of Canada rate cut at this time.”

Major U.S. banks cut their prime rate by half a point, to 4.5 per cent, the same level as Canada's, after the Federal Reserve moved.

TD's move was just one signal that the aggressive rate cuts by central banks were not immediately resolving the dysfunction gumming up lending markets.

The Bank of Canada had to intervene in overnight money markets again on Wednesday morning, this time with a $430-million injection, in order to drag drifting overnight rates back to its target.

“It's not a huge surprise, but it's a real problem,” said Dale Orr, chief economist at Global Insight Canada. “It makes monetary policy less effective than it otherwise would be.”…

The Canadian central bank's key rate is now 2.5 per cent, down from 3 per cent…

Canada needs an emergency rate cut because U.S. growth is weaker, trade is dropping off, and the domestic economy is no longer flying high on the profits from high commodity prices.

But mortgage rates in Canada have actually risen over the past week, and the central bank moves on Wednesday don't seem to be able to change that momentum.

Banks can't afford to cut their prime rates because they're paying exorbitant costs to fund their own borrowing through global credit markets, said Mr. Hockey.

“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 25 basis points. We see this as a balanced move in managing our funds and passing along the intended benefits to our customers.”…

Banks in Australia have also refused to match their central bank's recent cuts, noted Eric Lascelles, chief economics and rates strategist at TD Bank…

“Really the motivation is that bank borrowing costs are absolutely through the roof by any definition, so this is not in any way shape or form a gouging operation, it's one where you're really just trying to minimize your losses,” he said.

But, “it does mean that the Bank of Canada has a little less traction,” he said. “But at times like this keep in mind that central easing is intended in large part to help the financial sector.”

Economists said they expect further rate cuts are in store from the Bank of Canada.

Inflationary pressure is not an issue any more, the central bank said, since demand from Canadian consumers and businesses is no longer strong. Its next date to set rates is Oct. 21.

Still, if commercial banks refuse to follow the central bank's lead in taking interest rates lower, the Bank of Canada will no doubt be asking itself what the point o