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Interest rates are rising. Here's why your savings account isn't growing

Globe and Mail columnist David Berman.

The Globe and Mail

If you've parked some cash in a bank account or in GICs, you might be under the impression that the Bank of Canada's two consecutive rate hikes over the past few months are good news: Savings rates are sure to rise, vindicating your responsible ways with money.

You are wrong.

Many financial institutions have already passed along this week's central bank quarter-percentage-point hike to borrowers, raising their prime lending rates to 3.2 per cent on Thursday – but you may need a powerful microscope to see any increase in your savings rates.

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"Prime immediately went up by the full 25 basis points. Bond yields adjusted, so fixed rates are pushing up as we speak on the borrowing side," said James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage.

"But we have yet to see any ripple on the savings side," he added.

That's right: Even as interest rates start rising from the ultra-low levels that have rewarded spenders and borrowers for most of the past decade, savers are still getting next to nothing.

Why? The simple reason is because lenders can get away with it.

For years, low interest rates have left financial institutions with slim profit margins on loans. At the start of 2017, these margins were about 2.5 per cent among retail loans, according to research from RBC Dominion Securities, down from about 3 per cent a little over a decade ago.

Now, with rates rising, lenders are at last able to enjoy margin expansion that will reward shareholders – as long as these lenders keep rates on deposits low.

That might anger some savers, especially those that don't own bank stocks. But the unfortunate reality is that savers don't amount to much in this indebted country. It's a borrower's world.

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You can see this fact reflected in Statistics Canada surveys that peer into our financial accounts.

Sure, we have houses, mutual funds and pensions – but preciously little amounts of cash next to our gargantuan debts.

In the latest survey, for 2012, the average household deposit in a financial institution was $4,000, down slightly from 2005.

At the same time, though, the average household mortgage rose to $150,000. Lines of credit rose to $15,000. Credit-card debt rose to $3,000. Vehicle loans, up to $15,000. And so on.

Equifax Canada reported earlier this week that non-mortgage consumer debt rose 3.3 per cent in the second quarter over last year, to the equivalent of $22,595 a person. Add mortgage debt to that, and you can see why savers, and their savings, are next to invisible in the market.

Put another way, if your debts are vastly larger than your savings, you are going to care far more about the rate you are paying on those debts than the rate you are getting on those savings at bank accounts and guaranteed investment certificates.

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Lenders know where your attention is, and it's not on your savings.

But it's not all bad news.

For one thing, savers aren't being hit with higher costs the way that borrowers are. Savers might not be making more money, but they're not losing it either.

For another, yields on five-year GICs issued by the large banks over the past few months have crept up to about 1.6 per cent from 1.5 per cent, according to Ratehub.ca. That 0.1-percentage-point increase looks like an insult relative to the 0.5-percentage-point increase in interest rates by the Bank of Canada over the past three months, but at least the GIC yields have moved in the right direction.

And finally, savers can hold out for larger rewards if the Bank of Canada continues to raise rates as it adjusts to surprisingly strong economic growth and unwinds the monetary stimulus put in place following the financial crisis.

"I do expect at some point, as rates in Canada continue to rise, there will be an adjustment to all deposit and savings products," Mr. Laird said. "It just seems to be that [financial institutions] just don't look at it as closely as they do on their lending side."

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