Canadian banks break ranks by holding back rate cut
The FP article below discusses TDCT, however the same now applies to CIBC, RBC, BMO and Scotiabank
Eoin Callan, Financial Post TD has decided to pass on to customers only part of the hefty cut in interest rates by the Bank of Canada.
The bank will pocket a third of the rate cut to improve its own profit margins, while customers will see the prime lending rate reduced by only .5 per cent, instead of the full .75 per cent rate cut announced by the central bank.
The decision is controversial because it comes at a time when governments and central banks worldwide are pumping liquidity into markets in a bid to make credit more available to consumers and businesses.
The Bank of Canada explained Tuesday that it was cutting rates by the most in years because the economy was sliding into a recession as the global outlook worsened.
But the impact of the monetary stimulus is lessened if banks only pass on part of the rate cut.
The move is also politically charged because of moves by the government to bring funding costs for banks down, including guaranteeing new borrowing by banks in international credit markets.
Yet bank executives say the cost of funding in international markets remains extraordinarily high.
Yet there have also been signs that TD has been looking for some time at breaking with the tradition in Canada of banks cutting the prime rate in lock step with the Bank of Canada.
In research papers and interviews the bank has been a leading advocate of the view that Canada is moving towards a model seen in other countries where institutions pick and choose how much of a rate cut to pass on to consumers.
This is creating new competitive dynamics in Canada's retail banking market that have little precedent, with rival banks watching each other closely and engaging in an elaborate game of chicken to determine who will cut most.
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