Banks cut prime, but split on new rate

A $25-billion mortgage backstop from the federal government prompted Canada's banks to announce cuts in their prime rates Friday, although by different amounts.

TD Canada Trust and the CIBC will cut their rates by 15 basis points to 4.35 per cent, they said.

But the Bank of Nova Scotia, the Bank of Montreal, the Royal Bank, National Bank, Laurentian Bank and Caisse Centrale Desjardins opted for a 0.25 per cent cut, to 4.25 per cent.

All of the reductions  take effect on Tuesday, Oct. 14, the day after Thanksgiving.

The cut "will reinforce confidence in the Canadian economy," Chris Hodgson, Scotiabank's head of domestic personal banking, said in a release.

Earlier Friday, Finance Minister Jim Flaherty said the government would buy $25 billion worth of Canadian mortgage-backed securities to "make loans and mortgages more available and more affordable for ordinary Canadians and businesses."

The banks welcomed the move.

"We believe that this initiative will be put into effect in a way that will reduce our overall cost of funds and, as a result, we are dropping our rate today," Tim Hockey, president and CEO of TD Canada Trust, said in a release.

The Bank of Canada cut interest rates by half a percentage point earlier this week, but the commercial banks only passed on half the reduction.

Under the government's mortgage proposal, the $25 billion will flow back to the banks and other institutions as a way of injecting cash into the country's mortgage market.

The federal government anticipates that few of these mortgages will default and most are guaranteed by the CMHC. Ottawa actually expects to earn a profit from its holdings of the securities.