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How the Bank of Canada Benchmark Rate Impacts Deposits

There have been four Bank of Canada interest rate hikes since July 2017. While that’s often bad for borrowers, it should be good for savers.

The central bank influences short-term interest rates by increasing or decreasing the target for the overnight rate, which is its benchmark interest rate. The Bank of Canada interest rate has risen to 1.5% from 0.5% over the last 13 months and is now at its highest level since December 2008.

When the benchmark rate rises, financial institutions will raise their respective prime rates. And when the benchmark rate falls, the prime rates also decline. The prime rate is used to set rates for various types of loans, including variable rate mortgages. Financial institutions will generally raise rates for GICs and high-interest savings accounts when the Bank of Canada’s benchmark rate rises. However, that isn’t always the case, especially in the last year.

One bank, Tangerine, keeps track of historical rates for the savings products it offers. Rates for the Tangerine Savings Account (excluding the 2.75% rate for new clients) have barely risen over the past year. It’s currently at 1.1%, up from 0.8% in July 2017 even though the benchmark rate rose by one full percentage point.

But some rates haven’t changed at all. The interest rate for the EQ Bank Savings Plus Account has remained at 2.3% for more than a year.

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On the other hand, Tangerine’s GIC rates have increased significantly over the same period of time. A one-year GIC has a rate of 2.5%, compared to 1.3% just 13 months ago.

When the Bank of Canada cut the benchmark rate twice in 2015 to 0.5% from 1%, Tangerine lowered the interest rate on its savings account twice to 0.8% from 1.3%. But when the central bank cut rates by a quarter point in January 2015, the rate for Tangerine’s one-year GIC fell to 1.05% from 1.35%. Then the rate crept up to 1.3% until the Bank of Canada cut rates by another quarter point in July 2015 and the GIC rate fell to 1.2%.

So why don’t financial institutions’ rates on savings accounts and GICs always rise or fall in lockstep with the Bank of Canada’s benchmark rate? Because they don’t have to. While financial institutions often increase or decrease their prime rate whenever the central bank makes a move (usually on the same day), they’ve tended not to do so when it comes to deposits.

The Big Six banks have no reason to increase rates immediately because they still have about 85% of all deposits despite the fact their rates are so paltry.

If you’re looking for a better rate, consider a smaller bank or credit union. To compete against the big guys, the GIC and high-interest savings account rates offered by smaller financial institutions are much better.

For example, Oaken Financial and Duca Credit Union both have a one-year GIC with a rate of 2.8%. Among the big banks, CIBC has the best rate with a one-year GIC yielding 2%. By choosing a smaller institution, you’ll end up earning more.

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The bottom line

When the Bank of Canada raises its benchmark rate, it should be good news for savers. But that’s not necessarily the case. Banks can match the increase if they want to and many aren’t in a rush to do so. Shop around for better deposit rates to get more for your hard-earned savings.

Photo by Jungwoo Hong on Unsplash