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Why did Manulife cave to Flaherty pressure?

The question isn’t why Jim Flaherty stepped in. That part we know. The issue is why Manulife listened. On Monday, Manulife announced that it would cut its five-year fixed posted mortgage rate from 3.09 per cent to 2.89 per cent, following BMO down below the 3 per cent threshold.

They knew Flaherty was going to be mightily peeved about the move. It was not even two weeks ago that the Finance Minister warned against the perils of rock-bottom rates on household debt, and even going so far as to congratulate other banks for not shadowing BMO down the primrose path of dalliance.

Manulife, however, couldn’t seem to help themselves. While they sided with Flaherty in principle, spokesperson Laurie Lupton telling the Globe and Mail that “Manulife Bank agrees with the government that Canadians shouldn’t take on more debt than they can handle," the bottom line is that it isn’t props from Parliament Hill that lead to big bonuses at the end of the year, it’s profits.

This is a business, after all, and “part of the value proposition we offer to clients is to offer competitive rates," Lupton explained to the Globe.

So Ottawa be damned, they sunk their rates … for half a day. That’s roughly how long it took before someone in HQ to conclude that flipping the Finance Minister the finger might not be the smartest long-term move. Mind you, it was an understandably tempting one. It’s not like they were doing anything illegal or even unwise in offering an ultra-cheap deal to consumers. Given the cooling of the housing market, the heat is on all lenders to spur demand, and the pressure is only intensified when the much bigger bank down the street has already slashed its rates.

Flaherty’s response was swift, and personal. “I had one of my staff call them and indicate my displeasure, which is the same thing I did with the BMO except I called myself” he told reporters within hours of Manulife’s announcement.

In fairness, it’s no surprise that he has an itchy trigger finger. You don’t need to dive too deep into the history books or travel too far south for that matter, to see the ruinous impacts of near-zero interest rates, especially in a setting where debt-to-income levels are already at record levels. It’s also no surprise that he would muster every tool within sight to dissuade Canada’s banks from setting off a mortgage war when housing prices in most markets remain plenty steep.

The big unanswered issue is why Manulife balked. Banking and insurance are heavily regulated industries. As Flaherty showed last summer when he tightened the rules around mortgages, making it harder for people to assume as much debt, he has the power to change the economics of the industry very quickly. We don’t know the exact language used when relaying Flaherty's thoughts to Manulife yesterday, but it’s a fair bet the lender was reminded of the power of his office.

In truth, where exactly the sidelines are anymore is open question. The posted rate of fixed mortgages is like the sticker price on a car. It’s a general guide, it isn’t the final amount. There are countless variables, some buried in the details, others a matter of negotiation, that influence the rate a customer actually receives. Still, that 3 per cent benchmark holds symbolic weight, and anytime a bank dips below it, policy makers such as Flaherty get understandably nervous.