# The history of GIC rates

This post was first published on May 5, 2015, and was updated on April 5, 2024.

There are definitely reasons to buy GICs: they provide security of capital and also generate some income. With interest rates reaching as high as 8% in the past two years, GIC returns right now are exceptional compared to the previous average of approximately 2% prior to the pandemic. One-year GICs pay upwards of 5% now, or even as high as 5.5%, if you’re fortunate.

## Real vs. nominal GIC returns

Before we take a deep dive into the data and what impacts GIC rates, it’s important to understand the difference between two types of returns: real and nominal.

The nominal return is simply the face value interest rate you receive. For example, if you buy a 1-year GIC yielding 5%, your nominal return is 5%.

By contrast, the real return takes into account the effect of changes in a broad basket of consumer prices. Usually, this is inflation, but deflation (an overall reduction in prices in the economy) can also occur. Inflation means that each dollar has less purchasing power, whereas with deflation, the purchasing power of a dollar increases. Imagine that you have \$100 and prices for everything in the economy rise by 8%. Now your \$100 doesn’t buy as much.

Similarly, if you’re receiving 5% annually on an investment, but inflation is running at 8% year-over-year, as we saw in June 2022, the net result is that the purchasing power of your money is actually declining by 3% per year. So even though your money is growing in nominal terms, in real or inflation-adjusted terms, it’s actually falling. We tend to focus on nominal returns, but it’s the real return that truly matters.

There’s a very simple formula for calculating the real return of an investment, such as a GIC:

Real Return = Nominal Return – Annual Inflation Rate OR Deflation Rate

In the case of consumer price deflation (which admittedly is rare), note that you are subtracting a negative number, which actually adds to your real return. So let’s say you’re earning 5% on a GIC and the consumer price index (a measure of inflation) falls by 2% in a year. We then subtract (-2%) from 5% for a real return of 7%.

## Historical GIC rates

Now let’s see how GIC rates have fared historically. First, we pulled data from the Bank of Canada website, to show the nominal returns for 1, 3 and 5-year GICs going back to 2005. The average nominal returns from 2005-2014 were between 1.40-2.28%. If we compare that to the average consumer price index, which was 1.81% from 2005-2014, the average real return was between -0.41% to 0.47%.

For a longer-term view into GIC history, we can look to the 1980s, when GIC returns were pretty great. Take 1983. A 5-year GIC paid 11.3%, and inflation was only running at 4.6%; that’s a real return of 6.7% (11.3% – 4.6%). Even in 1995, a 5-year GIC paid 7.1% with inflation at 1.7%, for a real return of 5.4% (7.1% – 1.7%).

GIC rates are partly influenced by the Bank of Canada’s interest rate announcements, specifically the movement in the prime rate. When interest rates rise, the rates banks pay on GICs and other financial products usually also increase. The Bank of Canada’s prime rate sat at an incredibly high level in the 1980s - between 12% up to 17%, in order to tame the high rate of inflation seen during that time.

We’ve seen higher rates of inflation in the past few years, too, but not nearly to the level recorded in the 80s. There have also been several interest rate hikes starting in March 2022, bringing our benchmark interest rate to a staggering 5%, when it was previously as low as 0.25%. This inevitably brought GIC rates higher, too, so investors could enjoy higher rates. Now, though, economists are predicting that target interest rates will drop beginning in summer 2024, so longer term GICs are paying lower rates than shorter-term GICs. This is known as the inverted yield curve effect.

Let’s look at today’s GIC rates using a 1-year GIC at 5%. The annual rate of inflation in Canada is 2.8% as of February 2024, so the real return on a GIC paying 5% would be 2.2%. As explained above, 1-year GIC rates tend to pay higher rates now because of the inverted yield curve.