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Consumers, lenders on same page: little appetite for interest rate cut

CIBC World Markets suggests the country’s biggest lenders will repeat what they did during the last interest rate cut in January passing on only a portion.
CIBC World Markets suggests the country’s biggest lenders will repeat what they did during the last interest rate cut in January passing on only a portion. THE CANADIAN PRESS/Sean Kilpatrick

A new poll suggests an overwhelming number of Canadians, many of whom are servicing already high debt burdens, won’t seek to tap more in the event interest rates are cut this week.

Experts say private lenders aren’t overly keen to drop rates further either.

The poll, released by the Canadian Imperial Bank of Commerce, found 93 per cent of respondents said they are unlikely to increase their borrowing if rates drop. That compares with only seven per cent who say they’ll consider adding more debt if rates come down.

Meanwhile, one-third of those polled said they could use a rate cut as an opportunity to accelerate debt repayment.

There is widespread speculation the Bank of Canada might reduce its trend-setting policy rate in an attempt to stimulate the economy, which many believe has slipped into a technical recession – defined as two consecutive quarters of negative growth.

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Off the charts

Another rate cut could be throwing fuel on an inferno, experts warn, serving to fan home prices higher in already scorching markets.

“A further rate reduction risks inflaming the already-raging inferno under way in the housing market,” Doug Porter, chief economist at Bank of Montreal, said last week. “June home sales figures for Toronto and Vancouver were quite simply off the charts.”

MORE: Interest rate cut risks sending housing market ‘off the charts’

“Our estimate is that sales in the two cities combined hit an all-time high on a seasonally adjusted basis in the month. In fact, even with a moderate decline in Alberta, it’s quite possible sales across the country hit a record high,” Porter said.

A cut Wednesday will encourage even more borrowing and deepen the record debt loads home owners and borrowers have accumulated – something the Bank of Canada itself has warned is the central domestic risk to the economy.

Won’t pass on?

Other experts say banks aren’t overly enthusiastic about another rate cut, either, something which would push them to drop already rock-bottom lending rates even further (cutting into profits earned on interest).

A note from bank analysts at CIBC World Markets on Tuesday suggests the country’s big banks are likely to repeat what they did during the last rate cut in January and pass on only a portion of the cut.

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“We would not expect an overnight rate cut to be met with a full reduction in bank prime rates,” CIBC analysts said. They suggested the country’s biggest lenders would shave prime rates by 10 basis points if the central bank cut its key lending rate another quarter of a percentage point, or 25 basis points.

Normally such a move might anger the Bank of Canada, whose main purpose in dropping its key rate is to have the lower rates flow in full back to borrowers. But this time may be different.

“We are not convinced that the central bank is keen to stimulate the housing market further and may be indifferent to such a compromise,” the CIBC note said.

Recession risk

Still, a rate cut is the bank’s primary tool to ward off an economic slowdown, experts say, even if the impact is diminished. And odds have grown in recent weeks the country’s central bank will again slash its key, trend-setting interest rate when it makes its latest policy announcement on Wednesday.

MORE: Canada’s economy shrinks again amid oil shock

An economy that may have just tipped into recession and requires a jolt is the prime reason, experts say, a spectre Statistics Canada data made apparent last week.

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The online survey of 1,508 people was conducted for CIBC July 6-7 by Angus Reid. The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

WATCH: Home prices are already so high in some cities, first time buyers have little to no hope. Mike Drolet reports.

— with files from Canadian Press

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