Banks cut interest rates half as much as central bank wants

Canada's central bank moved Wednesday to cut short-term interest rates by half a percentage point, but Canadian banks are cutting rates only half that much.

Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and TD Canada Trust said they will trim their prime lending rates by 25 basis points — meaning a quarter of a percentage point — effective Thursday.

The prime lending rate is what banks charge credit-worthy business customers on short-term loans. Other interest rates, including certain mortgage rates, may be linked to the prime rate but set several points higher.

Tim Hockey, CEO of TD Canada Trust, issued a statement saying his bank is doing its best to help the central bank.

"Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions. This makes it challenging to match the Bank of Canada rate cut at this time," he said.

"We recognize the efforts the Bank of Canada is making and, despite the fact that our cost of funds remains high, we have decided to reduce our rate by 25 basis points. We see this as a balanced move in managing our funds and passing along the intended benefits to our customers."

The other banks issued one-sentence notes saying they will cut their prime rates to 4.5 per cent from 4.75 per cent, the same cut announced by TD.

The Bank of Canada, in a move co-ordinated with the U.S. Federal Reserve and other central banks, cut its target for the overnight rate half of a percentage point to 2.5 per cent. The central bank describes that rate as its key policy interest rate, signalling its intentions to credit markets.

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