Anger builds as banks fail to pass on rate cuts
Consumers say stimulus being pinched
By Bill Mah, Edmonton Journal
The Bank of Canada cut interest rates to a record low today to stimulate the economy, but it's likely to stoke something else too - growing anger from ordinary Canadians who complain that banks are pocketing much of the savings.
Wendell Dunning, a 50-year-old Edmonton machinist for a steel company, says his longtime bank not only hasn't passed along the break from a December interest rate cut, it suddenly raised the rate on his personal line of credit to prime plus three per cent from prime plus two.
"I went nuts," Dunning said. "The rates are going down to en-courage people to spend money and borrow to get the economy going and they're turning around and stealing it from us."
Dunning is part of a backlash of Canadians increasingly frustrated with a perceived lack of action in lowering key lending rates.
Both the Consumers' Association of Canada and the Canadian Federation of Independent Business are fielding record numbers of complaints from people all over the country who want to know why mortgage, business and personal lending rates haven't decreased substantially in response to the slumping economy or the falling Bank of Canada rate.
"We are getting more calls on the principals of these issues than we ever have before," said Bruce Cran, a spokesman for the consumers'association. "The government is giving them (banks) a break on the interest rate at prime level and they are not passing any of that on."
Canadian chartered banks base their prime lending rate, sitting Monday at a historically low 3.5 per cent, on the Bank of Canada's lending rate. Both of those rates play a key role in determining interest rates for mortgages and consumer loans.
As of last week, posted rates for a popular five-year fixed mortgage from Canada's four biggest banks were 6.75 per cent. In January 2004, when both the Bank of Canada and bank's prime rate were much higher, that same mortgage was being offered at 6.35 per cent.
The Bank of Canada's overnight lending rate is sitting at 1.5 per cent, the lowest overnight loans to the banking system have been in the past 50 years. That rate is expected to fall further today.
While chartered banks have traditionally lowered or raised their interest rates based on the Bank of Canada's rate announcements, they are not bound by law.
In December, when the central bank slashed its rate by three-quarters of a point down to 1.5 per cent, the commercial banks responded with only a half-point cut in their prime rates for the blue-chip borrowing rate, to which floating-rate consumer and business loans are directly tied.
Terry Campbell, vice-president of policy for the Canadian Bankers Association, said Canadian banks have been working to lower interest rates and have been successful in doing so through the fall. However, he said it's harder than ever for banks to raise funding to lend to businesses and consumers.
"In order to be able to lend, banks have to borrow,"Campbell said. "It's the cost of raising these funds in the marketplace, that's what drives the interest rates that banks charge.
"Where banks will raise their money in the marketplace is through things like the bond market and deposits. We are still cutting our costs, but we have to bear in mind the costs that we face in the marketplace."
That explanation holds little weight for Dunning.
"They're penalizing someone like me who has an excellent credit rating and has never missed a payment and they're turning around and taking another per cent off me," he said.
Randall Morck, a professor of finance with the University of Alberta School of Business, said banks are gun shy about loan defaults during the economic downturn.
"The banks are just as scared as everybody else because they lost a whole bunch of money, too," Morck said.
By Bill Mah, Edmonton Journal
The Bank of Canada cut interest rates to a record low today to stimulate the economy, but it's likely to stoke something else too - growing anger from ordinary Canadians who complain that banks are pocketing much of the savings.
Wendell Dunning, a 50-year-old Edmonton machinist for a steel company, says his longtime bank not only hasn't passed along the break from a December interest rate cut, it suddenly raised the rate on his personal line of credit to prime plus three per cent from prime plus two.
"I went nuts," Dunning said. "The rates are going down to en-courage people to spend money and borrow to get the economy going and they're turning around and stealing it from us."
Dunning is part of a backlash of Canadians increasingly frustrated with a perceived lack of action in lowering key lending rates.
Both the Consumers' Association of Canada and the Canadian Federation of Independent Business are fielding record numbers of complaints from people all over the country who want to know why mortgage, business and personal lending rates haven't decreased substantially in response to the slumping economy or the falling Bank of Canada rate.
"We are getting more calls on the principals of these issues than we ever have before," said Bruce Cran, a spokesman for the consumers'association. "The government is giving them (banks) a break on the interest rate at prime level and they are not passing any of that on."
Canadian chartered banks base their prime lending rate, sitting Monday at a historically low 3.5 per cent, on the Bank of Canada's lending rate. Both of those rates play a key role in determining interest rates for mortgages and consumer loans.
As of last week, posted rates for a popular five-year fixed mortgage from Canada's four biggest banks were 6.75 per cent. In January 2004, when both the Bank of Canada and bank's prime rate were much higher, that same mortgage was being offered at 6.35 per cent.
The Bank of Canada's overnight lending rate is sitting at 1.5 per cent, the lowest overnight loans to the banking system have been in the past 50 years. That rate is expected to fall further today.
While chartered banks have traditionally lowered or raised their interest rates based on the Bank of Canada's rate announcements, they are not bound by law.
In December, when the central bank slashed its rate by three-quarters of a point down to 1.5 per cent, the commercial banks responded with only a half-point cut in their prime rates for the blue-chip borrowing rate, to which floating-rate consumer and business loans are directly tied.
Terry Campbell, vice-president of policy for the Canadian Bankers Association, said Canadian banks have been working to lower interest rates and have been successful in doing so through the fall. However, he said it's harder than ever for banks to raise funding to lend to businesses and consumers.
"In order to be able to lend, banks have to borrow,"Campbell said. "It's the cost of raising these funds in the marketplace, that's what drives the interest rates that banks charge.
"Where banks will raise their money in the marketplace is through things like the bond market and deposits. We are still cutting our costs, but we have to bear in mind the costs that we face in the marketplace."
That explanation holds little weight for Dunning.
"They're penalizing someone like me who has an excellent credit rating and has never missed a payment and they're turning around and taking another per cent off me," he said.
Randall Morck, a professor of finance with the University of Alberta School of Business, said banks are gun shy about loan defaults during the economic downturn.
"The banks are just as scared as everybody else because they lost a whole bunch of money, too," Morck said.
Labels: Financing
0 Comments:
Post a Comment
Your comment here
Links to this post:
Create a Link
<< Home