As always, the banks lost no time in upping their interest rates on floating-rate loans after the Bank of Canada (BoC) hiked interest rates on Wednesday.
Customers with variable rate mortgages and lines of credit are facing higher interest rates as of Thursday after all of Canada’s Big Six banks raised their prime lending rate to mirror the central bank’s move to increase its key interest rate from 1.25 per cent to 1.5 per cent. Correspondingly, the banks’ prime rates rose from 3.45 per cent to 3.7 per cent.
But borrowers’ loss won’t necessarily translate into a win for savers.
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Whenever the BoC lifts rates “borrowing rates will move almost immediately, but saving rates do take more time,” said Janine White of Kanetix, the company behind rate-comparisons site RateSupermarket.ca.
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It typically takes weeks for lenders to raise interest rates on guaranteed investment certificates (GICs), said James Laird, president of Toronto-based CanWise Financial, a mortgage brokerage owned by the operator of RateHub.ca, another popular rates-comparison site.
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GICs are low-risk investments that guarantee a set return – usually in the form of a fixed interest rate – for a set term that can be as short as 30 days or as long as 10 years.
Often, even when GICs rate do move after a BoC rate hike, they won’t rise by as much as as the central bank’s rate did, he added. And some lenders won’t adjust their GIC rates at all, he said.
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Anyone thinking of putting some money into a GIC “should wait to see what happens” over the next few weeks, Laird told Global News.
But if you’re looking for a low-risk return on your money, you might want to take a close look at savings accounts, too, Laird added.
A plain-vanilla savings account at some of Canada’s online banks and credit unions may net you more than a five-year GIC held in a non-registered account, according to search results from both RateHub and RateSupermarket.
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For example, EQ Bank’s Savings Plus account has an interest rate of 2.3 per cent on deposits. Leaving a $5,000 balance in there for five years net you $575 before tax, assuming no rate changes, according to RateHub. Alterna Bank’s High-Interest eSavings account, with its 2.05 per cent rate, would leave you with $510. And Implicity Financial’s High-Interest Savings account at 2 per cent interest would leave you with $500 more in your pocket.
By comparison, if you locked your funds into a five-year GIC, you’d get $400 or less before tax with several of the big banks.
“This doesn’t really make any sense,” Laird said. “You would expect that at some point we should start to see a spread [between short-term interest rates such as those on savings accounts and longer-term rates like those on five-year GICs], but we’re not really seeing that right now.”
In part, this has to do with increased competition, with smaller banks trying to lure customers away from the behemoths of Canada’s financial industry, said Laird. Online banks, credit unions and smaller lenders also top the rankings of the best GICs, with interest rates of up to 3.5 per cent on a five-year term deposit, according to both RateHub and RateSupermarket. (Meanwhile, several lenders are offering rates of 1 per cent on their savings accounts, which is less than half the current rate of inflation. And rates on some accounts are even lower.)
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But there are larger forces as well that seem to be pushing shorter rates closer to longer-term rates. The difference between rates on short-term and long-term government bonds is shrinking, something economists call “a flattening yield curve.” That’s unusual because investors generally demand a higher interest rate for lending their money for longer to compensate for inflation.
The flattening yield curve has economists and financial analysts worried that the bond market, which has a spectacular track-record of anticipating recessions, is expecting the kind of low inflation that you often see when the economy goes into reverse gear.
But whether or not that happens, the flattening yield curve has implications for savers.
“You should start to expect to see a shift from long-term to short-term deposits,” Laird said.
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And Canadians should keep an eye to what happens with the rate on their savings accounts, too.
After an interest rate hike by the BoC, some lenders adjust their rates on savings accounts and some don’t, but consumers are usually more focused on monitoring what happens to GICs, said White at Kanetix.
This time, paying attention could pay off big time.
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