A small but encouraging rate war is being fought over five-year GICs.
EQ Bank is offering 3.52 per cent on a guaranteed investment certificate with a five-year term, just surpassing the 3.5 per cent offered by Oaken Financial. Several other small independent banks are offering rates in the 3.1-per-cent to 3.3-per-cent range, while the big online bank Tangerine offers 3 per cent. Expect more battling over the months ahead on rates for both GICs and savings accounts.
GICs are where the growth is in the personal banking business these days. The latest update from financial industry consulting firm McVay and Associates said total growth in this core banking segment over the previous 12 months was 4.4 per cent, compared with 5.8 per cent for the previous year. “Growth is slowing across all products except term deposits,” the report said.
Another report, this one from the bank consulting and technology company Novantas, predicts an acceleration in what it describes as a slow revival of interest in GICs as a result of rising interest rates. Novantas says GICs now account for a little more than 32 per cent of non-registered personal deposits – that could rise to 37 per cent by the end of next year if there are three additional rate increases by the Bank of Canada through 2019.
Rising demand for GICs should help stimulate competition between GIC providers for market share. But there’s a second reason to be optimistic about better GIC rates ahead. Novantas has looked at how quickly banks reacted to higher rates in the past and it seems that rates respond most generously once the rising rate trend is well established.
Novantas looked at what happened to savings accounts during the 2004-06 period of rising rates. During the first cumulative increase of 100 basis points in the Bank of Canada benchmark rate (100 basis points equals one percentage point), personal savings account rates rose by 25 basis points. On the second increase of 100 basis points, savings account rates increased by 39 basis points.
The current cycle of Bank of Canada rate increases began in July, 2017, and the cumulative rise has been 100 basis points, or a full percentage point. The next, more rewarding phase of rate increases could begin as early as Sept. 5 or Oct. 24, dates on which the central bank will announce whether it plans to change rates.
“We do expect things to get more interesting,” said Adel Mamhikoff, managing director in Novantas’ Toronto office. “As the industry moves from the first 100-basis-point increase to the second, more and more of the increase starts to get passed along to the consumer. We see that on both the savings and GIC side.”
Increases in GIC rates could be sweeter than those for savings accounts. Mr. Mamhikoff said higher savings account rates must be paid out to all a bank’s savings clients, while increased GIC rates apply just to customers buying these specific products.
The big disappointment of rising rates is that banks have moved slowly to adjust their savings and GIC rates higher. The slothful pace of rate increases looks especially greedy in light of a stunt the banks pulled when rates were falling back in 2015.
After the Bank of Canada cumulatively cut its benchmark lending rate by half a percentage point, the banks lowered their prime lending rate for customers by just 0.3 of a point. It’s customary for the two rates to move in lockstep, and they certainly have done that as borrowing costs increased lately.
GIC rates are affected competition between issuers, the trend for the Bank of Canada’s overnight rate and also rates in the bond market. The yield on the five-year Government of Canada bond, which influences both five-year mortgage and GIC rates, has risen from 1.5 per cent at the end of August, 2017, to about 2.23 per cent recently.
Expect bond yields to keep chugging higher if inflation keeps its momentum. The cost of living was up 3 per cent in July on a year-over-year basis, compared with 2.5 per cent in June. Rising inflation will add to your living costs, but it’s one of several factors that are helping to end the long, dark night of GIC investors and savers.
Rob Carrick