Question

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.)..... The change in the benchmark interest rate was 25 basis points (from 1% to 1.25%) on January 17, 2018 . Why do you think that the mortgage rates went up by 15 basis points instead of 25 basis points

Answer 1

It is the policy of any Central Bank to increase or decrease interest rates based on the macro-economic scenario. This helps it to deal with liquidity, inflation and other parameters.

The Bank of Canada raised benchmark interest rate by 25 basis points. However the top five banks raised only 15 basis points. A reason behind would this have been the fact that is the banks had raised their rates by 25 basis points, it would have been the end consumer i.e. the mortgage loan borrower who would have to pay additional interest. Thus the banks would have been wary of having to lose their customers due to this rate hike.

Another reason could be the fact that the banks are already offering a very large spread i.e. CIBC is offering 4.99% i.e. a 3.99% spread over the benchmark interest rate. Thus the hike has somewhere been already discounted in its current interest rate. Thus any additional hike would only make it lose its competitiveness in the lending market and thus it would have had maintained status quo on this aspect. Other banks would have risen rates as they would not have had discounted the same. Even though they may have discounted the same, their managements would have some strategy to mitigate the same through some other measures to ease the pain on the customers.

The banks might also have risen this because they would not have wanted an abrupt crunch in the liquidity and thus it is also better that even if there is a measure of taking liquidity out of the system by way of interest rate hike it should be in a smooth fashion rather than going for an abrupt hike in rates and an abrupt liquidity crunch.