Skip to main content

Big Six banks hike prime rates, moving in step with Bank of Canada increase

Bank towers are shown from Bay Street in Toronto's financial district.

Adrien Veczan/THE CANADIAN PRESS

It will take very little time for many Canadian borrowers to feel the effects of the first rate hike in seven years.

After the Bank of Canada raised its key overnight lending rate by 25 basis points – a quarter of a percentage point – on Wednesday morning, the country's largest banks quickly followed suit. By the end of the day, the Big Six banks had all raised their prime lending rates to 2.95 per cent from 2.7 per cent, effective Thursday. As the basis for most variable loans, the higher prime rate will immediately result in additional borrowing costs on products like variable-rate mortgages, home equity lines of credit, and other credit lines.

The domino effect of rate hikes could become a familiar theme in the months ahead as further potential rate hikes put scrutiny on overly indebted Canadian borrowers, many of whom could be tested by higher interest costs. For banks, the rise in rates will help boost profits earned on loan portfolios by providing better margins.

Story continues below advertisement

Explainer: How the rate hike affects homeowners and buyers

Related: Rising rates: An investor's guide to a new era

Rob Carrick: Five harsh realities of rising rates for savers and borrowers

"Borrowers should be prepared for rates to continue to push up toward historic norms," said James Laird, co-founder of rate-comparison site RateHub.ca. "We're still in an abnormally low interest-rate environment."

Meanwhile, Canadian savers with little debt who are hoping to finally start to earn decent returns on savings may have to continue to be patient. Returns on deposits not linked to prime rates are typically much slower to respond to a rising rate environment, Mr. Laird said.

"They're much quicker to pass along the hike when they're the ones collecting the interest, rather than when they're the ones paying it."

That appears to have been the case the last time the Bank of Canada raised rates.

Story continues below advertisement

Starting in June, 2010, three successive 25-basis-point rate hikes lifted the overnight lending rate from emergency levels brought on by the global financial crisis.

As the Bank of Canada rate rose to 1 per cent from 0.25 per cent, Canadian banks hiked their prime rates in lockstep. But the returns on guaranteed investment certificates remained just where they were through the rest of the year, averaging below 2 per cent, according to Bank of Canada data.

The course of rate policy in 2010 was ultimately interrupted by renewed weakness in the global economy, including the European sovereign debt crisis. Then the oil price shock beginning in 2014 forced Bank of Canada governor Stephen Poloz to again cut rates.

Now, once again the domestic economy has improved enough to justify a reduction of monetary stimulus. While Wednesday's rise of 25 basis points still leaves rates at ultra-accommodative levels from a historical perspective, Canadian borrowers have grown unaccustomed to rates moving upward, Mr. Laird said.

"In 2010, [the hikes] didn't feel shocking, since we had just seen some crazy moves on the way down, getting to all-time lows faster than anybody expected. Now, seven years later, the market has gotten used to these rates. So today's rise feels a little more jarring."

After announcing the hike on Wednesday, the central bank acknowledged that the economy may be more sensitive to higher interest rates than in the past given the country's amount of household debt. Canadian households owed $1.67 in debt for every dollar in disposable income at the end of last year. Since 2009, when the housing boom started, total household debt has risen more than 50 per cent to $2-trillion and mortgages account for about 66 per cent of that, according to Statistics Canada.

Story continues below advertisement

"We will need to gauge carefully the effects of higher interest rates on the economy," the central bank wrote.

Higher interest rates are good for banks, which profit from the difference between the interest they charge borrowers and what they pay to savers.

So while prime rates generally move in tandem with the central bank's benchmark rate, in 2015, when the Bank of Canada cut its overnight rate by 25 basis points twice during the year, most banks responded by cutting their primes by just 15 basis points.

Passing through the full hike will help boost the banks' margins.

With a file from Reuters

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading…

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.