COMMERCIAL BANKS SLOW TO FOLLOW BANK OF CANADA INTEREST RATE CUT
The Vancouver Sun, April 23rd, 2008
But
the big commercial banks were slow to pass the rate relief on to
consumers and businesses, raising questions about whether they will
keep matching further rate cuts by the Bank of Canada, and how much
stimulus the central bank will be able to inject into the economy.
Don
Drummond, TD Banks' chief economist, said the chartered banks likely
didn't immediately cut their prime rates because their borrowing costs
have not come down as fast as the central bank's rate, and in some
cases have actually increased.
"We've
never had a situation where the bank rate has not been reflected in the
banks' cost of funds," he said, blaming the credit crunch for the
divergence. "This is a very unique circumstance.
"The
message is we shouldn't naively think that it's an automatic decision,"
Drummond said. "Banks like any other business do face costs of funds
and those costs of funds are not behaving in line with what is
happening at the Bank of Canada."
TD
Bank, following the lead of the Caisse centrale Desjardins, was the
first of the big banks to cut its prime rate to 4.75 per cent from 5.25
per cent, which it did well after markets had closed. The others began
following suit later.
The
prime rate is the benchmark rate to which many business and consumer
loan rates are tied, including those on floating-rate mortgages.
The
Bank of Canada, as well as cutting its target rate for overnight loans
between the banks to three per cent from 3.5 per cent, indicated that
there will likely be further rate relief down the road.
The
deeper and more drawn out downturn in the U.S. "has direct consequences
for the Canadian economic outlook, with declining exports projected to
exert a significant drag on growth in 2008," the central bank said. It
cut its forecast for economic growth this year to 1.4 per cent from the
1.8 per cent it expected in January and the 2.3 per cent it anticipated
last October.
"In
addition, tightening credit conditions and softening sentiment are
expected to moderate business investment and consumer spending," it
continued.
Further,
there will not be a full recovery until 2010, it warned, although it
predicted the domestic side of the economy will be supported by firm
commodity prices, high employment levels, and the effect of its
cumulative interest rates cuts, which now amount to 1.5 percentage
points since late last year.
It
is the second half-point cut in rates by the Bank of Canada in as many
months and the steepest string of cuts since 2001 -- when the central
bank last tried to buffer Canada from a U.S. recession.
"The
Bank of Canada has moved aggressively to keep tighter credit conditions
and the U.S. recession from morphing into a Canadian recession," said
BMO Capital Markets economists Douglas Porter, predicting that there
will only be a further modest cut in rates..
Supporting
the view that there will be more rate cuts, however, was a new forecast
that the Ontario economy slipped into a recession in the first quarter
of this year.
"As
recessions go, this one should be very mild," said the Institute for
Policy Analysis at the University of Toronto, which projected that
growth would resume in the third quarter.
The
Bank of Canada slashed its key interest rate a further half point
Tuesday, and hinted at more rate relief to come in an effort to keep
Canada from being dragged into recession by a deeper and more
protracted-than-expected downturn in the United States.
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