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Banks (Finance)

Interest Rates Take a Surprise Tumble in Canada

Strategic Insights

— 2 min read

Yesterday's unexpected drop in interest rates was met with optimism from some investors, but many are warning that the impact may not be as significant as hoped. The big banks collectively cut their prime lending rate by one-quarter of a percentage point to 7.75 per cent, following a similar move by the Bank of Canada. However, consumer and mortgage lending rates are unlikely to follow suit, as they have risen significantly in recent months in response to rising US rates and political uncertainty in Canada.

The prime rate cut was a surprise move, particularly given the looming Quebec election and government deficits. However, economists are pointing to a decline in US inflation fears and a rise in the Canadian dollar as contributing factors to the decision. The Canadian dollar has remained steady in the face of a sharp decline in the value of the US dollar against other major currencies.

Key Takeaways:

  • The big banks collectively cut their prime lending rate by 0.25 percentage points to 7.75 per cent, following a move by the Bank of Canada.
  • The prime rate cut is the first since rates began climbing in late March from 5.5 per cent.
  • Consumer and mortgage lending rates are unlikely to follow suit, as they have risen significantly in recent months in response to rising US rates and political uncertainty in Canada.
  • The Canadian dollar has remained steady in the face of a sharp decline in the value of the US dollar against other major currencies.
  • Canadian rates rose even further between March and June, mainly due to concerns over government deficits and debt, and the looming Quebec election.
  • The spread between Canadian and US three-month treasury bills has narrowed to about 1.5 percentage points from 2.3 points.

Statistics:

  • The prime lending rate was cut by 0.25 percentage points to 7.75 per cent.
  • The Bank of Canada rate fell for the third consecutive week.
  • The yield on 10-year federal government bonds fell by almost one-fifth of a percentage point, about triple the decline in comparable US bonds.
  • Yields on treasury bills fell sharply.
  • The Toronto Stock Exchange's composite indicator of 300 stocks rose 0.7 per cent on the day.
  • The spread between Canadian and US three-month treasury bills narrowed to about 1.5 percentage points from 2.3 points.

Sources:

  • [BRUCE LITTLE, Toronto]
  • [Andrew Pyle, Chief Canadian Economist at MMS International]
  • [John Johnston, Assistant Chief Economist at Royal Bank of Canada]
  • [Paul Gardner, Money Market Trader at Toronto-Dominion Bank]
  • [Bank of Canada]

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