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RBC is the First to lower it’s interest rate, following Bank of Canada’s Interest Rate Cute that Shocked Many!

Big banks across Canada were reluctant to lower their prime-lending rate following last week’s surprise cut in the Bank of Canada’s key lending rate. However, RBC was the first of the big banks to lower its savings interest rates by trimming its prime rate by 0.15% to 2.85%.

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The Bank of Canada announced last Wednesday that the key overnight rate were dropped 0.25% to 0.75%. RBC’s rate cute was much smaller in comparison to the move made by the Bank of Canada last week.

RBC stated that the rate reduction is an approach taken by the Bank to balance actual costs of funds and help customers save money on variable-rate mortgage, line of credits and floating rate loans.   (CBC News, Jan 27, 2015).   When prime rates fall, a wide range of floating interest rate loans like lines of credit and variable-rate mortgages fall corresponding to the shift in prime rates. This means that borrowers can expect to pay less on their debt repayments and loans.

Traditionally, when the Bank of Canada makes a change in its key rate, prime rates quickly follow. But for six days, the banks didn’t move their primes despite pressure from consumers looking for relief on their floating-rate loans.  (CBC News, Jan 27, 2015).

Fixed mortgage rates have already begun to drop slightly at many banks. But longer-term fixed-rate mortgages depend on the bond market, not the Bank of Canada’s overnight rate. With yields on longer-term bonds steadily falling and now at historic lows, it’s not surprising that fixed mortgages have begun to slide.

There are predictions that perhaps there is another rate cut forthcoming in the near future this year. It will be quite interesting to see what this rate cut means to the Real Estate market and housing prices as it will soon unfold.

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