As the Bank of Canada raises interest rates, borrowers are feeling the pinch. Traditionally, higher interest rates are expected to result in better savings rates. However, experts say that the relationship between borrowing costs and savings rates is not always straightforward. Consumers must be nimble and proactive to take advantage of competition in the banking industry.
When the central bank rate increases, savings rates on products like guaranteed investment certificates (GICs) and high-interest savings accounts (HISAs) tend to rise as well. However, the response from financial institutions may not be immediate. Banks are not obligated to raise their HISAs rates when the central bank rate increases, but they may do so to attract more depositors.
Competition dynamics play a significant role in determining savings rates. If one bank raises its HISA rates, other banks will likely face pressure to follow suit in order to attract customers. When asked about their savings rates during the Bank of Canada’s tightening cycle, CIBC confirmed an increase in rates on all savings accounts after the latest rate hike in July. National Bank also confirmed an increase in rates on their HISA over the past year.
Canada’s big six banks (TD Bank, RBC, Scotiabank, BMO, CIBC, and National Bank) dominate the financial sector. However, customers tend to remain loyal to their primary bank even when other institutions offer slightly better rates. Advisors suggest that consumers consider switching to smaller financial institutions that offer promotional rates that are often one to two percentage points higher.
While switching banks can be beneficial, consumers need to be cautious. They should ensure the new bank or credit union offers the same protections as more established institutions. Fortunately, many financial institutions, including smaller banks, offer up to $100,000 in coverage under the Canada Deposit Insurance Corporation.
Transferring money between institutions may involve fees or penalties. However, many smaller banks cover these fees to simplify the switching process. Advisors encourage consumers to take advantage of competitive rates and find accounts that align with their financial goals and lifestyle.
Investors also have the option of Guaranteed Investment Certificates (GICs). As the central bank rate rises, GICs tend to offer better savings rates. GICs are suitable for investors with shorter-term or specific investment horizons, as they guarantee a certain return over a specified period. However, GICs are less liquid compared to HISAs, and higher-risk options in the stock market may offer better returns over the long term.
In summary, the relationship between interest rate hikes and savings rates is not always linear. Consumers should remain proactive and take advantage of competition in the banking industry to maximize their savings. Switching banks and considering alternative savings options like GICs can be beneficial, but individuals need to evaluate their financial goals and consider the risks and limitations associated with each option.
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