On Wednesday July 12, 2017, the Bank of Canada raised its key lending rate for the first time in 7 years, citing current economic growth and increased consumer spending as key reasons. An increase in the key lending rate brings hope to what has been a less than solid Canadian economy for far too long. However, the media frenzy surrounding the Bank of Canada increase has nevertheless missed one key aspect: how banks are profiting massively from this change, increasing Prime a full 0.25% when they should only increase it by 0.15%.
“Banks are profiting massively from this change”
What most consumers are not aware of is that the banks did not follow the last two Bank of Canada key lending rate decreases. In fact, the banks have the right to set their own Prime and use the Bank of Canada’s lead as a guideline. Between 2000 and 2008, banks offered Prime rates 1.75% above the Bank of Canada’s key lending rate, passing off savings and increases to Canadians based on the Bank of Canada’s lead.
In December 2008, the banks began pricing their Prime rates at 2.0% above the Bank of Canada’s key lending rate, passing on the extra cost to Canadians. Since 2015, this spread has increased to 2.2%; this means that since December 2008, Canadians have consistently paid 0.45% higher rates than necessary on their variable rate mortgages, lines of credit, and floating loans, in relation to the key lending rate.
“Canadians are paying 0.45% higher rates than they should be”
In January 2015, the Bank of Canada decreased Prime by 0.25% to help stimulate the economy; at the same time, the banks reacted by dropping Prime to 2.85%, with just 0.15% savings passed on to Canadians. Again in July 2015, the Bank of Canada dropped Prime by 0.25%, and four of the big banks dropped to 2.70%; TD stayed at 2.85%.
The Table below shows the rate changes since 2013 as well as the ‘Fair Prime,’ the Prime rates Canadians should be paying through the major banks.
Essentially, Canadians are the victims of an unfair and illogical increase to Prime; in a logical sense, Prime should be set at 2.85% at the big banks.
“Canadians are the victims of an unfair and illogical increase to Prime”
This is what it comes down to: Canadians should receive back that 0.15% increase, since the savings were not passed on during the last Bank of Canada decrease. Quite simply, it is unfair of the banks to take advantage of such an opportunity. Perhaps it is their attempt to increase their spread between the key lending rate set by the Bank of Canada and their own prime. They may even intend to jump a full 0.25% on the next Bank of Canada increase to maintain a new standard of 2.2% over the key lending rate, thus padding their pockets with more profits at the expense of hardworking Canadians.