Banks cut prime lending rates after Bank of Canada slashes benchmark rate to 0.5%

Canada's big banks have all cut their prime lending rates following the announcement that the central bank had lowered its benchmark interest rate to 0.5 per cent.

2nd time since January that central bank has cut lending rate

Stephen Poloz admits economy isn't doing well as predicted 2:12

Canada's big banks have all cut their prime lending rates following the announcement that the central bank had lowered its benchmark interest rate to 0.5 per cent.

It was the second time this year the Bank of Canada had dropped the rate to stimulate the economy, after holding the rate steady for about four years.

The central bank's rate influences the rates that commercial banks offer because it affects their cost of borrowing. Although they're not obligated to, banks tend to pass on the savings or the costs.

TD Bank announced within minutes of the Bank of Canada's decision that it will cut its prime lending rate to 2.75 per cent, starting Thursday.

But TD's cut was initially only 10 basis points lower than it had been, not a 25-point cut that the central bank announced. TD had pocketed a similar amount when the central bank cut its rate by 25 points in January, passing on only 15 basis points to its customers.

Later in the day, however, Royal Bank, the Bank of Montreal, CIBC and Scotiabank all announced they were decreasing their prime lending rates by 15 basis points to 2.7 per cent from 2.85 per cent, effective July 16.

TD eventually followed suit, matching the other banks at 2.7 per cent.

The Canadian dollar fell more than a cent to in reaction to the news, reaching the lowest level seen since 2009, when Canada was in a recession. The loonie closed at 77.40 cents to the U.S. dollar. All things being equal, rate cuts normally drive currencies lower because they make the country's economy less attractive to foreign investors.

"The bank's estimate of growth in Canada in 2015 has been marked down considerably from its April projection," the bank said in a statement announcing the news Wednesday.

Stephen Poloz cut the Bank of Canada's benchmark interest rate on Wednesday to 0.5 per cent from 0.75.

"Real GDP is now projected to have contracted modestly in the first half of the year," the bank said, which is its way of saying it expects the Canadian economy to have shrunk in the first half of 2015 — the technical definition of a recession.

- Doug Porter, BMO economist

The bank is now forecasting a rebound later in the year, but a small one: 1.1 per cent growth in GDP for all of 2015. As recently as April, the bank was expecting 1.9 per cent growth this year.

BMO economist Doug Porter said the central bank's policy statement Wednesday is a much bleaker view on the economy than other recent ones. 
Dollar drops to 77.27 cents U.S. in reaction to the lowest level interest seen since 2009, when Canada was in a recession 5:31

"We believe they are too downbeat on second-half prospects, but admittedly optimists have been quite simply wrong this year," Porter said.

The bank's new rate — also known as the "target for the overnight rate" — is a 25 basis-point reduction from its previous 0.75 per cent level.

Before the Bank of Canada cut the rate to 0.75 in January, it had been at one per cent since late 2010.

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