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I don't imagine Canadian Finance Minister Jim Flaherty is particularly happy with Royal Bank of Canada today, but he can hardly blame RBC's cut of its mortgage rates on another case of reckless banks behaving badly. The bank is merely responding to market conditions – some that merely reflect economic reality, and others that Mr. Flaherty himself may have unwittingly fuelled.

Mr. Flaherty has, in the not-so-distant past, railed against cuts in mortgage rates, even taken steps to prevent and reverse them, as he continues his battle to cool Canada's overheated housing market and thus quell the threat of Canada's excessive levels of household debt. But RBC's decision to trim its posted two– to five-year fixed mortgage rates by 10 basis points (ten-hundredths of a percentage point) hardly looks rash, given what has been going on in the bond market.

Canada's five-year government bond yield has slumped 30 basis points in less than a month, as some sluggish economic indicators on both sides of the border (most notably, unimpressive employment figures for December) have let some of the air out of the market's interest rate expectations. This is the market in which the banks, and their mortgage lending arms, are operating, and for that reason five-year government bond yields are a reasonable benchmark for mortgage lending rates; RBC's small cut is actually a pretty mild reaction to a tangible shift in bond-market conditions.

Still, let's consider the competitive environment in which the banks are operating. The regulatory changes in mortgage lending standards that were spearheaded by the Finance Minister's office have, as intended, served to cool Canada's housing market and slow household debt growth – though perhaps not to the extent that Mr. Flaherty had hoped. At the same time, though, they have shrunk the size of the pie for lenders; banks are competing for a smaller pool of potential mortgage clients who qualify under the tighter rules. Toss in the necessary and inevitable (if painfully gradual) shift toward consumer deleveraging that has barely begun, and that will shrink the customer base even further.

At a time when growth in other segments of the Canadian bank business (such as trading and investment banking) hasn't exactly been booming, there is understandable pressure at the banks to hang onto and even market share in the mortgage lending market, even as that market shrinks. Naturally, the best way to do lure customers will be to trim rates when the opportunity arises. RBC's rate cut may be an early, modest signal that the fight for market share is on.

Keeping things in perspective, the problem this presents for Mr. Flaherty is nothing like it was last spring. Since then, Canadian five-year fixed mortgage rates have risen 60 to 70 basis points, as bond yields have rebounded from historic lows. Experts agree that interest rates are likely headed higher this year, as the U.S. Federal Reserve tightens its monetary policy and the economic recovery accelerates. Nevertheless, some of the forces Mr. Flaherty has introduced into the mortgage market, in an effort to cool demand, may keep some unintended downward pressure on the very rates that the Minister had been trying to steer higher.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:23pm EDT.

SymbolName% changeLast
BMO-N
Bank of Montreal
+1.35%97.68
BMO-T
Bank of Montreal
+1.13%132.25
BNS-N
Bank of Nova Scotia
+1.21%51.78
BNS-T
Bank of Nova Scotia
+0.94%70.07
CM-N
Canadian Imperial Bank of Commerce
+1.3%50.72
CM-T
Canadian Imperial Bank of Commerce
+1.13%68.67
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62
TD-N
Toronto Dominion Bank
-0.43%60.38
TD-T
Toronto-Dominion Bank
-0.63%81.75
Y-T
Yellow Pages Ltd
-0.3%9.86

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