Canada Banks Unlikely to Fully Match Bank of Canada Cut: CIBC

  • Cut of five to 10 basis points likely as banks protect margins
  • Bank of Canada decision on Wednesday for benchmark rate

Canadian banks are unlikely to fully match any Bank of Canada interest rate cut as they seek to protect lending margins amid expectations for rising loan losses, according to CIBC World Markets analyst Robert Sedran.

The banks will probably cut five or 10 basis points if the central bank reduces interest rates by 25 basis points on Wednesday, Sedran said in a note to clients. Canada’s banks reduced their prime rates twice last year after the Bank of Canada cut its overnight target rate by 25 basis points in January and July. Both times lenders failed to match the central bank’s move. Prime rates, which set borrowing levels for products such as variable mortgages and credit lines, had been at 2.7 percent for the banks since mid-July.

“As the overnight rate gets closer to zero, margin pressure becomes more acute and especially in a year in which loan losses would appear set to begin rising, we think bankers will be -- and should be -- very focused on protecting their revenues,” Sedran said Tuesday.

The odds of a cut at the central bank Wednesday stood at 51 percent at 9:13 a.m. Tuesday, according to Bloomberg calculations based on swaps trading. Expectations of a cut have been rising as commodity prices continue to tumble amid signs of slowing global growth.

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