With lenders cutting rates in the wake of the BoC’s announcement, what is the most prudent financial advice you can give your clients?
Yesterday TD led the Big Five in cutting prime in the wake of the Bank of Canada's 25 basis point chop, but its decision to give borrowers only a fraction of that savings raises questions about what advisors should now be telling clients.
This marks the second time this year that TD has passed on the central bank’s rate decision. In March, the bank was a late holdout, joining with other financial institutions by lowering their prime rates to 2.85 per cent only after receiving pressure from consumers. Cumulatively, TD has reduced its lending rate by 25 points over a period of time when the BoC has cut theirs by twice that number.
In yesterday’s Financial Post, Penelope Graham, editor of RateSupermarket.ca, said: “It will be interesting to see if other banks follow suit or [if] someone will take a more competitive approach.”
Indeed, pundits and economists alike have been speculating at how other banks might respond to the central bank’s cut and whether or not one outlier might seek to make a claim on the market. Graham adds: “They really don’t have room to discount too much.” Because banks are already so near breaking even, they can only drop a few points without compressing their profit margins.
In a recent briefing note, Benjamin Tal, Deputy Chief of World Markets at CIBC, addresses the central bank’s cut:
“Another 25 basis points will do little to make or break a financing decision.” Assuaging fears amidst talk of rising household debt in Canada, Tal asserts that “it’s unlikely that another modest cut in rates will lead to a new wave of borrowing.”
Lenders are likely to floating rates, which provides an opportunity for advisors to encourage their clients to pay back their debt.
