The Big Banks Are at it Again!
Yesterday the Bank of Canada announced it was cutting the overnight rate by .25%. to 1/2 per cent. Normally when the overnight rate is lowered, banks follow suit and drop their prime rate accordingly. However this past January, when the overnight rate dropped by .25%, the banks changed pattern. TD announced it wasn’t going to drop rates at all before RBC announced it would lower their prime by .15% instead of the full .25%. All the other banks followed suit (including TD a while later)!
Fast forward to this announcement and 12 minutes after the Bank of Canada announcement, TD announced they would be lowering their prime rate by .10% to 2.75% which immediately drew criticism and public outrage (well online anyway). RBC, BMO, Scotia and CIBC have all announced they are lowering their primes again by .15%, instead of passing on the complete savings as intended by the Bank of Canada. TD (made to look a fool twice now) gave in to peer pressure and matched the drop of .15%.
Variable rate mortgage holders can expect to see a new prime rate of 2.70% shortly.
So in 2015, the Bank of Canada has tried to stimulate the economy by dropping rates by .50%, while the big banks have only passed on .30% to consumers. Where is the extra .20% going? Directly into bank profits. There is a reason people say “buy bank stocks not bank products”.
What about When Rates Go Up?
It will be very interesting to wait and see what happens when rates finally start to climb. The logical conclusion would be the next couple of times the Bank of Canada increases rates by .25%, banks follow suit by only increasing .15%. However as that might be a long time from now; it looks like we could be in a low rate environment for a few years to come, I will make a mental note right now on my blog to check in at that time!