Banks cut prime rates half a percentage point

Blog by Mike Cook | March 6th, 2009

Canada's chartered banks slashed their prime lending rates by half a percentage point Tuesday, mirroring a similar Bank of Canada cut in the bank rate this week.

At least five major banks — RBC, Bank of Montreal, National Bank of Canada, TD Canada Trust and CIBC — reduced their charges to their most credit-worthy customers by 50 basis points.

It marked the second time in a row Canada's major lending institutions quickly followed the Bank of Canada's lead in reducing borrowing charges by the same central bank decrease.

In January, the private banks dropped their lending costs by half a percentage point, following the Bank of Canada's lead.

Prior to January, however, the banks had endured a blizzard of criticism when they only passed a portion of the Bank's rate reduction to their customers, leading to cries of "gouging" by consumer groups.

Long-term money

At the time, the banks argued they raised or lowered mortgage rates in response to the cost they pay for borrowing money for different periods of time.

By January, the credit crunch had eased somewhat, experts said.

"The one big difference [in January] is that recently the short-term funds in the market have come down," said Don Drummond, TD's chief economist, in January.

This analysis indicates, however, that future mortgage rates might not be headed south in the coming months.

For example, in mid-February, the interest rate on a 30-year mortgage in the United States stood at 5.07 per cent, according to Wells Fargo Bank, a financial institution that specializes in the housing market.

While that rate is much lower than the 6.24 per cent lenders would have received for the same mortgage one year earlier, borrowing costs have not dropped in recent weeks. That is despite the fact that the U.S. Federal Reserve has set its interest rates at zero.

"In the most recent survey period, mortgage rates were little changed amid continued Treasury supply concerns, weak economic data and concerns about struggling banks," said Wells Fargo in a mortgage rate commentary in February.

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