Question

0 . Here is a quote from the article: “ The Bank of Canada raised its benchmark interest rate to 1.25 per cent Wednesday and signalled that, b arring certain risks, more hikes are likely in the rest of the year. ... Even before Wednesday’s decision, five of the country’s largest banks hiked five - year fixed rates 15 basis points to 5.14 per cent last week. (CIBC is still offering 4.99 per cent.) ” What specific argument of the modern finance theory would you subscribe to explain the behavior of the five largest banks, which raised their mortgage rates by 15 basis points even before the Bank of Canada’s announcement on Wednesday?

Answer 1

Rate hike was a rear-view mirror move which would boost up their profits.Rising interest rates allow banks to make higher profits by improving their net interest margins, the difference between what they pay to attract deposits and what they charge to lend money. The economy’s impressive run has prompted another interest-rate hike from the Bank of Canada.The central bank pointed to unexpectedly solid economic numbers as key drivers behind its decision.In explaining the hike, the bank said in a statement that inflation was close to target and the economy was operating roughly at capacity. It also said consumption and residential investment had been stronger than anticipated, reflecting healthy employment growth.Business investment has been increasing at a solid pace, and investment intentions remain positive.Moving forward, the bank predicted household spending and investment to gradually contribute less to economic growth, given the higher interest rates and stricter mortgage rules. It predicted Canada’s high levels of household debt would amplify the effects of higher interest rates on consumption.