Big Canadian banks snub BoC interest rate cuts

October 9, 2008

The Bank of Canada slashed its key lending rate to 2.5 per cent yesterday, October 08, one of many central banks making the move around the world. But, major Canadian banks are not passing along half-point cut. Instead they are cutting their prime rates by just a quarter of a percentage point.

This comes as a surprise, as the big banks normally always follow the central bank’s cuts, even if they say they can’t afford it. Toronto-Dominion Bank was the first institution in Canada to make a prime rate cut to 4.5%. The other major Canadian banks followed throughout the day.

Sherry Cooper, BMO Capital Markets chief economist, said that the big banks simply couldn’t afford the cut. They are trying to beef up their balance sheets as a result of losses associated with bad loans they incurred in their operations.

There is very little that the central bank or government can do directly to get the banks passing on the same rate reduction to the public. She added “it would take a year to 18 months before the effects of the rate cuts could be seen”.

Earlier Wednesday, Flaherty said the Bank of Canada has already taken steps to protect the economy, such as boosting the availability of funding to banks and widening the range of collateral it will accept — as well as the co-ordinated interest rate cut announced on Wednesday.

“This significant action will provide timely support for the Canadian economy,” Flaherty said.

Click to read the CTV article.

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