Senator Pierrette Ringuette

Pass the savings on, Canadians tell banks; Cost to borrow isn't budging, despite low rates

Canadians are becoming increasingly frustrated with the country's biggest banks over a perceived lack of action in lowering key lending rates.

Both the Consumers' Association of Canada (CAC) and the Canadian Federation of Independent Business (CFIB) are fielding record numbers of complaints from people all over the country who want to know why mortgage, business and personal lending rates haven't decreased substantially in response to the slumping economy.

"We are getting more calls on the principals of these issues than we ever have before," said Bruce Cran, a spokesman for the CAC. "The government is giving them (banks) a break on the interest rate at prime level and they are not passing any of that on."

The Bank of Canada's overnight lending rate is sitting at 1.5 per cent, the lowest it has been in the past 50 years. That rate is expected to decrease further tomorrow, when the bank is scheduled to make its next rate announcement.

Canadian chartered banks base their prime lending rate, now sitting at a historically low 3.5 per cent, on the Bank of Canada's lending rate. Both of those rates play a key role in determining interest rates for mortgages and business loans.

As of last week, posted rates for a five-year-fixed mortgage (the most popular among Canadian households) from Canada's four biggest banks were 6.75 per cent. In January 2004, when both the Bank of Canada and the bank's prime rate were much higher, that same mortgage was being offered at 6.35 per cent.

Business loans have proven just as confusing. Some Canadian enterprises are reporting that despite the downward pressure on lending rates, their interest rates are suddenly increasing, putting further strain on their business.

"We have been hearing from our members about increased costs for existing credit. This isn't even new credit," said Catherine Swift, president of the CFIB. "Suddenly, they are being asked to pay more for it. There is no doubt the banks are looking for money and they are using any means at their disposal to get it."

Terry Campbell, vice-president of policy for the Canadian Bankers Association, fired back, saying Canadian banks have been working to lower interest rates and have been successful in doing so through the fall. However, he said it's harder than ever for banks to raise funding in order to lend to businesses and consumers.

"In order to be able to lend, banks have to borrow. It's the cost of raising these funds in the marketplace, that's what drives the interest rates that banks charge," he said.

Five-year-fixed mortgage rates from the country's four largest banks have fallen from 7.2 per cent in October.

He said the Bank of Canada's lending rate is often misunderstood. According to Mr. Campbell, the Bank of Canada's lending rate only affects short-term loans.

"That rate serves as a signal of Bank of Canada monetary policy. It affects only really one very short-term operation, and that is overnight lending," he said. "Costs to banks to raise funds are very high by historical norms."

Steve Foerster, a professor of finance with the Richard Ivey School of Business at the University of Western Ontario, said many people are basing their frustration on a trend they saw when times were good. While it has traditionally been the case that banks would lower or raise their interest rates based on the Bank of Canada's rate announcements, there is no law that states they must do so.

Mr. Foerster also said Canadian banks are now suffering through "unprecedented times," during which they are being forced to walk a tightrope between angering consumers and angering shareholders.

"It is a balancing act," he said. "They are in business to make money. ... They are trying to maintain their profitability."

Canadian banks posted profits of $19.5 billion in 2007. Profits are not expected to be that high for 2008, although results have not been released yet.

Liberal Senator Pierrette Ringuette, a member of the standing committee on banking, trade and commerce, urged the government to get involved in the bank situation and pin-point a compromise between profits and interest rates.

"The Bank of Canada reduced its lending rate in early December and there has been absolutely no reduction in any kind of interest rate," she said. "It seems the situation is one-way -- only from the bank's perspective. ... By golly, the citizens of Canada and the small- and medium-sized businesses of Canada need the break."