Bank of Canada rate hike can quickly influence consumer behaviour

Mnaimne’s deliberations illustrate the ways in which the Bank of Canada’s benchmark interest rate has the power to influence consumer behaviours. The central bank lifted its key interest rate Wednesday for the first time in seven years, pushing it to 0.75 per cent from 0.5 per cent.

Canada’s five biggest banks quickly followed suit, announcing they were increasing their prime lending rates by 25 basis points. Royal Bank of Canada (TSX:RY), the Bank of Montreal (TSX:BMO), TD Bank (TSX:TD), Scotiabank (TSX:BNS) and CIBC (TSX:CM) are all raising their prime rates to 2.95 per cent from 2.7 per cent, effective Thursday.

The prime lending rate is the rate that banks use to set interest rates for variable-rate mortgages and other loans.

Back in 2015, when the Bank of Canada twice cut its benchmark interest rate by 25 basis points, the banks passed along only a portion of the savings to consumers, cutting their prime rates by only 15 basis points each time.

But now they have passed along the full increase to consumers in a bid to protect their lending margins, which have been under pressure in recent years.

Although higher mortgage rates could dissuade some would-be buyers, the president and CEO of realtor Royal LePage says the impact will be minimal.

“It does raise the cost of a home, because most people buy homes on carrying cost, not on sticker price,” said Soper. “But it’s very minor and it’s been priced into banks’ risk models for several years now.”

Follow @alexposadzki on Twitter.

Alexandra Posadzki, The Canadian Press

by Canadian Press

Bank of Canada rate hike can quickly influence consumer behaviour

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