There’s a case to be made for banks giving borrowers a break when what is expected to be the biggest interest rate hike in 22 years is announced on Wednesday.
A brief flashback to 2015 is required to get the sense of this story. The economy back then was in the opposite shape of what it is now – weak enough to prompt the Bank of Canada to cut its trendsetting overnight rate by 0.25 of a percentage point in January and again in July.
The big banks hijacked part of that rate cut. While the overnight rate fell by a total 0.5 of a point, the banks cut their prime rate by cumulative 0.3 of a point. They held back the rest of the rate cut to build their revenues and profit.
Looking back, this was a big moment in banking in Canada. It highlighted a shift away from the critical scrutiny banks used to get from the public and politicians to more of an attitude that what’s good for banks is good for everyone.
Ryan Siever, a chartered professional accountant in Estevan, Sask., remembers what the banks did in 2015. Still riled about it, he got in touch last week to suggest they hold back passing on part of this week’s expected rate hike of 0.5 per cent. “It would be nice to kind of feel like the banks are looking after their clients rather than their bottom line,” he said in an interview.
We need higher interest rates – this is not in dispute. Inflation was running at a 30-year high of 5.7 per cent at the latest reading and shows no sign of easing. A higher overnight rate will discourage borrowing money to spend and over time cool inflation down.
“I understand that,” Mr. Siever said. “But I also go to the grocery store and I see my grocery bill is 30 per cent higher, and now my bank, which shows massive profits, is going to make even more off of me. You know, I would like to not feel pressure from every corner of the economy.”
What Mr. Siever proposes is for the banks to increase their prime by 0.4 of a point and hold back on 0.1. The banks could do this again at the next rate increase, which could easily be another 0.5 of a point.
This would only represent a small break for borrowers, but it would demonstrate some empathy for the borrowers who are going to struggle with rising rates. Every increase in the prime rate means higher borrowing costs for variable-rate mortgages, lines of credit and floating rate loans.
Going easy on rates this week would also be a way to offset the events of 2015, which included some of the snakiest bank behaviour ever. For context, it’s been my experience in covering business, economics, investing and personal finance for 30 years that when the Bank of Canada adjusts its benchmark rate, the big banks respond with matching changes by the end of the same day or the next morning.
In January, 2015, the banks delayed changing their prime for days before responding to the Bank of Canada’s cut of 0.25 with a drop of 0.15. In July, the banks were at it again. After the Bank of Canada cut by 0.25 of a point, Toronto-Dominion Bank at first lowered its prime by 0.1 of a point. Other banks cut by 0.15, and TD matched that.
Mr. Siever is one of just a few readers who have e-mailed over the past several years to recall how the banks pocketed part of those 2015 rate cuts. Overall, the country seems fine with it. In fact, the level of public criticism of bank behaviour in all aspects is as low as I’ve ever seen it.
The banks did some good work early in the pandemic helping people who couldn’t pay their mortgages and other debts because they were laid off. But the standing of banks is supported in large part by the dividends they pay investors. In Canadian investing culture, dividends are divine.
Mr. Siever is a bank shareholder, too. “As a shareholder, I’m happy,” he said. “As a client, I’m frustrated.”
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.