Financial markets were buzzing over suggestions that Canada's big banks may not cut their prime lending rates next week, despite an expected rate cut from the Bank of Canada.

The chartered banks normally raise or lower their prime rates in lockstep with changes the Bank of Canada makes to its key overnight lending rate.

The prime rate — currently six per cent — is the rate banks charge their best customers. It serves as the benchmark for a wide range of consumer borrowing, including variable mortgage rates, lines of credit and other floating-rate loans.

The central bank is widely expected to trim its key lending rate by a quarter of a percentage point to four per cent on Tuesday, amid growing signs of a modest slowdown in the Canadian economy.

But there are suggestions that the banks may not automatically lower their prime lending rates this time.

A report in Wednesday's Globe and Mail said some banks were contemplating keeping their prime rates right where they are, as a way of restoring their profits at a time when the credit crunch has forced interbank lending rates above the Bank of Canada's target rate.

Should the banks refuse to follow the central bank's lead, it wouldn't make borrowing any cheaper, making the Bank of Canada's rate cut largely ineffectual.     

Ted Carmichael, chief economist at JP Morgan Securities Canada, said it would not be unprecedented for this to happen.

While the spread between the prime rate and the Bank of Canada's policy rate has remained stable since 2000, he points out that the spread has widened before or during recessions in 1974-75, 1980, 1981-82, and 1990.

"As growth prospects deteriorated during these periods, credit risk rose and the spread between the prime rate and the [Bank of Canada] rate increased," he wrote in a note to clients Wednesday.

"It simply means that if the [Bank of Canada] desires to reduce borrowing rates for consumers, home buyers and businesses it has to make larger reductions in its policy rate," he said.

Carmichael noted that mortgage rates at the big banks have risen since the credit crunch appeared last August, even though the Bank of Canada delivered one rate cut in December and despite "sharp declines" in the one-year and five-year Government of Canada bond yields since the summer.