The Globe and Mail reports in its Thursday edition when the Bank of Canada slashed its key interest rate by 0.25 percentage point last week, the big question became whether the Big Six would follow suit. The Globe's Tim Kiladze and Tamsin McMahon write that within hours of the rate cut, TD Bank said it was considering holding its prime rate steady. To many Canadians, it looked like these lenders were being greedy. By not passing on the rate cut, products such as variable-rate mortgages and lines of credit did not become any cheaper.
However, the banks were in a pickle. Because interest rates were already so low, their lending margins were weak, and some bank executives had already warned about tougher times ahead for the industry. Cutting into these margins would only hurt their bottom lines even more. What the banks opted for was a half-measure -- cutting their prime rates by 0.15 percentage point to 2.85 per cent.
"Perhaps we have arrived at a classic Canadian compromise," CIBC World Markets analyst Rob Sedran said in a note. "Fifteen basis points means nothing to anyone," said Paul Gardner, portfolio manager at Avenue Investment. "It's more the perception, so that everyone knows about the rate cut."
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