Why Banks Slow To Lower Rates, But Quick To Hike Them?

Canada’s biggest banks raised their prime interest rates…

 

One after another following, the Bank of Canada increase of its policy rate to 0.75 per cent from 0.5 per cent. The base lending rate at the Big Six now is 2.95 per cent, compared with 2.7 percent before the central bank’s announcement. That’s how it is supposed to work. Except, the “transmission mechanism” between central bank to private banks isn’t always so automatic. When the Bank of Canada cut interest rates in 2015, the banking oligopoly was less keen to reduce what it charges borrowers for money. Also: higher prime rates don’t necessarily result in significantly higher deposit rates.

 

The trend: The financial crisis and its aftermath has been a public relations nightmare for banks. Their greed was seen by many as a major cause of the meltdown that brought on the Great Recession, and many of the worst actors got government bailouts. And then, as central banks dropped their benchmark interest rates to zero to prevent a depression, banks balked at passing on the full benefits of the cuts to their customers. But when policy rates rise, money quickly becomes more expensive. Bankers will say this simply is how banking works. But there is far less tolerance for that sort of rationale these days. The appearance of the biggest banks taking full advantage of their dominance over the financial system will feed a growing perception that the game is rigged.

 

We tend to think of the Bank of Canada as an omnipotent force. It’s actually more like a payday lender, albeit a benevolent one. Private banks must settle their accounts at the end of each business day and sometimes they are short of cash. The Bank of Canada will always lend them money, but it would rather not. So it encourages banks to seek loans elsewhere by offering money at a higher interest rate than can be found in what is known as the overnight market. Glass half full: Central bankers were annoyed that private lenders balked at transmitting lower policy rates. (The Bank of Canada dropped its policy rate by a half percentage point in 2015, but prime rates at the Big Six fell only 0.3 percentage point.) Interesting.

 

Glass half empty: Any of you savers who thought the Bank of Canada’s pivot would allow you to start earning a little interest could be disappointed. The banks have a greater incentive at the moment to charge us more to borrow than they pay us for our deposits, that’s not very nice. Bottom line: Canada’s banking oligopoly appears set to give us new reasons to grumble. If you want to punish the Big Six, take a chance with alternative lenders that offer higher deposit rates. Competition should eventually force deposit rates higher, as Canada’s biggest banks rely on their domestic client base to support their expansions elsewhere-isn’t that just dandy-NOT.

 

Article credit: Maclean’s

Photo credit: Rogers Media

 

 

 

 

Posted in All Stories, Annoucer Blogs, Morning Show with Miki Tagged with: , ,

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