01/27/2015 01:09 EST | Updated 03/29/2015 05:59 EDT

Banks face pressure to cut lending rates

Canada’s big banks have been the subject of pointed questions and even anger in the past few days for their reluctance to lower their prime lending rates following last week’s surprise cut in the Bank of Canada’s key lending rate.

It’s not hard to see why.

When prime rates fall, a whole range of floating interest rate loans like lines of credit and variable-rate mortgages fall in lock-step.

Usually, when the Bank of Canada moves its key rate, prime rates follow. But not this time — at least not yet.

The banks have responded to the dismay over their collective non-move by saying there’s more to a decision on changing the prime than simply mimicking the central bank.

“Our decision regarding our prime rate is impacted by factors beyond just the Bank of Canada's overnight rate,” read a statement from TD last week. “Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit.”

The translation, according to some analysts, is that the banks are feeling squeezed by reduced margin pressures lately and are trying to recoup some of that spread.  

The banks definitely did nothing to curry favour with their customers when several of them wasted no time cutting the interest they pay on their investment savings accounts by that same quarter of a percentage point that they’ve been so reluctant to apply to their primes.

Fixed-rate mortgages heading down 

That’s not to say there have been no cuts to bank rates.

Fixed mortgage rates began to drop slightly late last week at many banks. But longer-term fixed-rate mortgages depend on the bond market, not the Bank of Canada’s overnight rate. With yields on longer-term bonds steadily falling and now at historic lows, it’s not surprising that fixed mortgages have begun to slide.

A five-year fixed mortgage now carries a posted rate of 4.79 or 4.84 per cent at several banks, down 0.10 or 0.15 of a percentage point over a week ago. Most borrowers will pay considerably less than the posted rates.

TD Bank, for example, on Tuesday lowered its “special fixed-rate offer” for a five-year closed mortgage by a fifth of a point to 3.09 per cent. Many smaller lenders and independent mortgage brokers can offer even lower fixed mortgage rates.

So will the banks eventually give in to the pressure and drop their prime rates too?

Some think so.

“Lenders I’ve spoken with believe the odds are better than 50 per cent that banks will match the Bank of Canada’s rate cut and lower prime,” wrote broker Rob McLister on the weekend in his widely followed blog Canadian Mortgage Trends.

“If prime does drop, the consensus is that it may take until next week, or longer.”