Lending rate expected to be slashed

The Bank of Canada is expected to cut its trendsetting lending rate by as much as half of a percentage point today, but the credit crunch that has hit consumers in the United States is also limiting how much cheaper borrowing costs are for holders of fixed-rate mortgages in Canada.

While mortgage rates have eased slightly, some economists say the gap between the central bank's interest rate and what lenders are charging for mortgages remains wider than normal.

"There's still a big spread in the gap that has opened up between mortgage rates and, say, government-of-Canada bond yields of the same maturity that's been pretty common, not just in Canada, but in a variety of countries, which have also been affected by the credit squeeze," Ted Carmichael, economist at J.P. Morgan, said in an interview.

The spread between the Bank of Canada's overnight target rate has gone from less than 2.25 percentage points last year to a peak of more than 3.5 percentage points earlier this year, he said. The spread is now more than 3.25 points.

While the key bank rate has been cut a full percentage point since late last year, fixed-rate mortgages only recently began to decline, and have fallen about a third of a percentage point to a rate of about seven per cent for both one- and five-year rates.

Still, there is some disagreement over whether consumers are benefitting from lower central bank rates.

Gail Ouellette, a mortgage specialist with Scotiabank, said rate cuts by the Bank of Canada are indeed being passed down to consumers.

"If you go on any of the bank's websites, you'll see that the rates are pretty much flush," she said. "We're all pretty competitive; the major chartered banks are very competitive with one another."

And the rate on floating-rate mortgages, which are tied to the banks' prime rates, have declined in tandem with the central bank's key rate.

However, there has been speculation that commercial banks may break with recent tradition and not immediately match a further quarter or half point cut in the central bank rate today with a cut in their prime rates, which is the benchmark rate for floating-rate mortgages and for other loans to consumers and businesses.

Bill Robson, head of the C.D. Howe Institute, said "problems in the commercial-paper market have widened many short-term credit- and money-market spreads."

To offset that, the Bank of Canada has cut rates more than it likely would have otherwise and has also injected extra cash into credit markets, he said.

(prepared by Eric Beauchesne/Vancouver Sun)