Significance of Bank of Canada's decision for individual borrowers in question

OTTAWA – The move by the Bank of Canada to cut its key interest rate will help consumers out a little, but experts say with rates already near record lows, it won’t mean much for individual borrowers.

Canada’s big banks trimmed their prime rates by 0.15 percentage points to 2.7 per cent in the wake of the central bank’s move Wednesday to cut its overnight rate target by a quarter percentage point.

Sherry Cooper, chief economist at Dominion Lending Centres, questioned the effectiveness of the rate cut to boost the economy with the big banks only passing on a portion of the reduction by the Bank of Canada.

“At the margin, this might boost housing and consumer credit a bit, but these are not the sectors most in need of stimulus,” Cooper said.

Moves in the prime rate directly affect the amount charged on loans such as variable rate mortgages and floating rate lines of credit.

It’s the second time the central bank cut its key rate this year. When it chopped the rate in January by a quarter point, the big banks also passed on a cut of 0.15 of a percentage point to their customers then, too.

Some have raised concerns that lower interest rates will add fuel to the already hot housing markets in Vancouver and Toronto.

However, mortgage broker Frank Napolitano noted that the change in the prime rate doesn’t mean people will now be able to obtain larger mortgages because the rates used to qualify a borrower haven’t changed.

He estimated that for a $300,000 mortgage, the 15-basis-point cut could save a borrower a total of a little over $2,000 over five years.

“From a consumer point, it is better than nothing,” Napolitano said, noting that those with lines of credit tied to the prime rate will also save money.

Bank of Canada governor Stephen Poloz said Wednesday the interest rates charged borrowers are affected by more than just the overnight rate target.

“All we’re trying to do is have an influence on it,” he said.

Cooper said the spread between the Bank of Canada’s overnight rate target and the bank prime rate will eventually shrink, but probably not until interest rates are much higher than where they are today.

She said low interest rates have helped squeeze the big banks in recent years and they didn’t pass on the full rate cut to help protect their profit margins.

“The banks themselves have come under enormous regulatory pressure to increase their capital which makes their businesses far less profitable,” Cooper said.

“They will always in my view want to maximize the gap between what they can charge on loans and what they have to pay for money on the overnight market.”