Nobody saw this coming
Lee Welbanks here from Welbanks Financial. Let me fill you in on what the BoC and the Big Banks have been up to.
As I had already started writing another post about the (lack of) rate reductions, news hits today that Royal Bank has lead the charge to reduce prime – by .15%. It’s an unprecedented move as there has never been a rate movement, up or down, less than .25%.
It would seem that the banks are choosing to protect profit margins rather than pass on the intentions of the central bank in the form of lower borrowing costs. Normally, the Bank of Canada rate and the prime lending rate (the rate banks use as a base rate to charge clients) move hand-in-hand. Not this time.
One may wonder that when the Bank of Canada surprised everyone last week with their rate reduction, are the banks now trying to also send a message to the Governor of the Bank of Canada that they don’t like surprises. After all, no one saw this coming. Of 22 top economists polled, none expected to see a rate drop this time. The role of the Bank of Canada is to add stability to financial markets, not to create instability. Surprises like this cause some confusion in financial markets – something we try to avoid.
And with oil prices so low, it’s expected to impact both output and incomes. The largest impact will be in Western Canada where the oil patch calls home, but it will make it’s way through the economy and create a drag that economists expect will lower output and projections for the year.
I wouldn’t be surprised to see the other shoe drop and the banks reduce the full .25% over the upcoming days or weeks. For now, it sounds like they are sending a message to Stephen Poloz.
And I think the Bank of Canada will be more forthcoming with this type of information in the future. Economists are now predicting another rate cut at the next meeting in March – hopefully something our variable rate clients can benefit from.
If you want to learn more about this BoC decision, email me email@example.com and I’ll walk you through it. In the meantime, should you have any other mortgage related questions, I’d be happy to help.