Canadian Banks Cut Prime Rate Amid Market Volatility

Strategic Insights -

The Royal Bank of Canada was the first to announce the cut yesterday, followed by other banks and some trust companies, amid expectations that the recent volatility has ended. The key prime rate fell to 7.5 per cent, down from last week's 7.75 per cent, in anticipation of a drop of about 30 basis points in the Bank of Canada rate. Analysts believe that rates will stay down for a while, not spiking up again soon, as the dollar's stability and treasury bill yields decline.

Key Takeaways:

  • The Canadian chartered banks cut their key prime rate for the second time in less than a week, with a one-quarter of a percentage point reduction to 7.5 per cent.
  • The rate cut reflects the lower cost of funding for the banks as treasury bill rates fall, according to analysts.
  • The dollar's stability and decreased concern about U.S. interest rates and Quebec separation have contributed to increased investor confidence.
  • The Bank of Canada rate has declined 61 basis points after peaking at 7.09 per cent in June, and the central bank sold treasury bills at 5.88 per cent yesterday to slow down the rally.
  • The one-year mortgage rate is currently 8.95 per cent, while five-year loans are at 10.75 per cent.
  • Long-term bond yields have not fallen as much as treasury bill rates in the past week, reducing the push to lower mortgage rates.
  • The recent volatility has ended, at least temporarily, and rates will stay down for a while, not spiking up again soon, according to Michael Gregory, senior analyst with Wood Gundy Inc.

Statistics:

  • The prime rate cut reduced the cost of loans for the banks' most creditworthy customers by one-quarter of a percentage point.
  • The Bank of Canada rate peaked at 7.09 per cent in June and has declined 61 basis points since then.
  • The dollar was changing hands at 72.62 cents (U.S.) late yesterday, unchanged from Friday.
  • The one-year mortgage rate is 8.95 per cent, and five-year loans are at 10.75 per cent.
  • Treasury bill yields declined, contributing to the lower cost of funding for the banks.

Sources:

  • "Canada's chartered banks cut prime rate amid market volatility", The Globe and Mail (published date not specified)
  • Michael Gregory, senior analyst with Wood Gundy Inc., as quoted in The Globe and Mail (published date not specified)
  • Ian MacKay, Royal Bank's senior vice-president of treasury, Americas, as quoted in The Globe and Mail (published date not specified)