We’re a year out from the worst of the pandemic’s impact on financial markets, but the punishment for savers and conservative investors only gets worse.
Already scant returns on savings accounts have been sliding lately to a point where 1.25 per cent is becoming the new standard. EQ Bank, which has held the line better than most on rates in the past year, cut its savings rate to 1.25 per cent from 1.5 per cent on April 16. The introductory rate of 2.3 per cent for savings held in tax-free savings accounts and registered retirement savings plans falls to 1.25 per cent at the end of May.
Two other notable recent cuts take Canadian Tire Bank’s rate down to 1.55 per cent from 1.8 per cent and Oaken Financial’s savings account rate to 1.15 per cent from 1.25 per cent.
The news on rates for guaranteed investment certificates is mildly better. Oaken recently bumped up its five-year GIC rate to 2.1 per cent from 1.8 per cent, while the four-year rate goes to 1.9 per cent from 1.7 per cent. There was no change in the one-year rate of 1.4 per cent, which now looks attractive in light of what’s happening with savings account rates.
EQ itself has added some appeal to the GIC alternative to the savings account. For what the bank describes as “a little longer,” it will offer 1.5 per cent to people who lock into a three-month non-registered GIC and 2.3 per cent for a three-month TFSA or RRSP GIC. Note that this is an annualized rate – holding for three months gets you a proportional return.
Savings rates are influenced by the Bank of Canada’s overnight rate, which is holding for now because of the central bank’s commitment to supporting the economy with low borrowing costs. GICs are guided more by what’s happening with bond yields, which have risen sharply this year. The yield on the five-year Government of Canada bond has gone from 0.4 per cent to nearly 1 per cent, which is quite a jump in bond-market terms.
Savings rates are likely to disappoint this year – don’t expect any sort of a meaningful improvement. But if bond yields edge higher, GIC rates could follow suit. If you have money you want to keep safe and are in a position to lock down for up to 12 months, short-term GICs offer more value than savings accounts.
If you foresee needing your cash at some point, the lower rate from savings is more than offset by the benefit of being able to get your money when you need it at no cost.
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Rob Carrick