What an idiotic and unprofessional response. Even if you WERE on a nonrefundable rate, the hotel staff shouldn't EVER fire off a blast like that in email.

In this case, you are obviously dealing with someone who is not very good at THINKING and applying logic to resolve a situation. (If the problem is bad IT development, the hotel response should have been "We can't edit the rate on an existing reservation, but you can cancel it and rebook a new record at the lower rate.")

Hopefully it's a one-off and the rest of your hotel stay will be just fine.