The Bank of Canada has raised interest rates five times since July 2017. Although this is not the ideal situation for borrowers, it could be beneficial for savers. This central bank influences short-term interest rates by raising or lowering the overnight rate, which is its key rate.
This rate has risen from 0.5% to 1.75% in the last 15 months
As the key rate rises, financial institutions do the same with their own preferential rates. And when this rate is lowered, the rates of banks take the same path. Several types of loans, including variable rate mortgages, are based on this prime rate. Financial institutions typically raise their interest rates for GICs and high-interest savings accounts when the Bank of Canada’s policy rate rises. However, this is not always the case – especially during the last year.
Jenny Bank keeps a history of its rates for the savings products it offers. By omitting the 2.75% rate for new customers, the Jenny savings account rate has remained practically unchanged for a year. It is currently at 1.25% (0.8% in July 2017), despite the fact that the key interest rate has risen by one full percentage point.
Some Jenny rates were unchanged
While GIC rates increased significantly. Their one-year GIC is currently at 2.75%, while it stood at 1.75% 13 months ago. Why are interest rate fluctuations in savings accounts and GICs not exactly in line with the key rate? Because financial institutions have no obligation to follow the key rate. Although financial institutions raise and lower their prime rates as soon as the Bank of Canada moves in this direction (often the same day), they usually do not apply these changes to deposit rates.
Canada’s six major banks have no reason to immediately raise their rates because they already manage 85% of all deposits in Canada, despite their very low interest rates. If you want to get a better rate, consider a lesser known bank or a credit union. To compete with the big banks, the rates of high interest savings accounts and GICs offered by the smaller financial institutions are much more interesting.
Want a better GIC rate?
As the Bank of Canada raises its key rate, this could be beneficial for savers. But it’s not always the case. Banks have the opportunity to match their rates to this increase, but many are slow to do so. Remember to shop around for better rates for your deposits and better results for your savings.