Wednesday, January 16, 2008

Insubordination?!

This CBC article suggests that even if the Bank of Canada cut rates, banks wouldn't follow suit and cut rates to match.

Welll...this is either wrong, or says that there's a not a huge degree of competition among the major banks. Let's disregard sticky prices - changing the interest rate on a loan is not something that requires a long time to accomplish. I do accept that the market is perfectly competitive, but with five players, all of whom have relatively similar cost structures (not a shred of evidence to back up this belief, sorry), the oligopoly model of your choice should keep the spread close to where it was following a rate cut from Ottawa.
Should the banks refuse to follow the central bank's lead, it wouldn't make borrowing any cheaper, making the Bank of Canada's rate cut largely ineffectual.

Ted Carmichael, chief economist at JP Morgan Securities Canada, said it would not be unprecedented for this to happen.
...
"It simply means that if the [Bank of Canada] desires to reduce borrowing rates for consumers, home buyers and businesses it has to make larger reductions in its policy rate," he said.

I find this misleading. Presumably if the banks have the collective power to stand firm on a full (quarter-point, presumably) rate cut, it makes little sense to find that a half-point cut would permit a quarter-point decrease in rates to 'trickle down', if you will. At least, I can't think of any market model in which price changes act in this manner.

POSTSCRIPT: Given the volume of posts while I was working at HRSDC relative to the number of posts while I'm engaged in studies, does anyone want to try and estimate the value I place on earning a doctorate from a good school?

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