“Cutting rates on savings accounts is easy. It’s one product and those rates always drop when the overnight rate falls. Prime is different because it’s linked to so many other business lines, including retail, commercial and corporate banking,” said Mr. McLister.
“Assuming the banks are going to cut prime rate eventually, they may still be evaluating the unexpected impact on earnings, wanting to maintain margins a bit longer and/or making a statement to a Bank of Canada that essentially blindsided them.”
Peter Routledge, an analyst with National Bank Financial who follows the financial sector, said bank lending and deposit rates are influenced by a wide variety of factors, including the Bank of Canada’s overnight rate.
“Banks set their lending rates based on the entire yield curve — from overnight to 30-plus years. In addition, forward bond rates, the stage of the credit cycle, and competitive pressure also influence the decisions the banks make about their lending and deposit rates,” said the analyst. “We are in a rather extra-ordinary yield curve environment — for example, the 10-year government bond yield is 1.42%, according to the Bank of Canada, and the 30-yr yield is 2.06%. Given that inflation expectations run approximately 2% per year, we have negative interest rates out nearly 30 years.”
Mr. Routledge expects “in this extraordinary environment” market participants will react more cautiously than usual.
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