Banks are slow to raise interest rates on savings accounts because there is a lack of competition, argues an expert.
As inflation hits 8%, but that savings account rates do not increase, everyone who has put their savings in the bank will gradually lose their money.
It's the fault of savings account interest rates that are hovering around 1% and not keeping pace.< /p>
They will lose money. The value of their savings is decreasing, says Claire Célérier, an associate professor of finance at the University of Toronto.
Things were different the last time inflation hit. was also high. In 1981, when inflation reached 12%, Statistics Canada data indicates that the interest rate on savings accounts was then 19%. Even in 1990, when inflation had slipped below 5%, the interest rate on bank accounts was still above 9%.
One of the main causes of this gap is the concentration of the banking sector in Canada, believes Professor Célérier.
When competition is weak between banks, it takes them longer to adjust interest rates on savings accounts, she explains.
There is no incentive for banks to change their interest rate policy ;interest, she adds.
“When banks don't raise interest rates on savings accounts, they make more profits. It's a very easy way [to] achieve it”
—Claire Célérier, associate professor of finance at the University of Toronto
In the early 1980s, the advent of mutual funds offered an alternative to banks for the average saver.
A growing number of online banks and credit unions are offering competitive rates. After the Bank of Canada announced a one-percentage-point hike in its key interest rate in July, Oaken Financial raised its interest rate from 1.65% to 2.25%. For its part, Duca, a cooperative bank, increased its rate from 3.1% to 3.25%, says Natasha Macmillan, director at Ratehub.ca.
Canadians don't change banks very often. According to a 2020 Accenture survey, less than 4% of customers had switched their savings account to a competing bank in the previous year.
Some banks began to raise their interest rates, often through short-term promotion. Offer often has restrictions and is not open to everyone.
Banks are quick to take advantage of high interest rates for loans, but slower to act on those who want to save, Macmillan finds.
Scotiabank offers a temporary rate of 4.05% on the Momentum Savings Account. CIBC offers a rate of 3.55%, but drops to 0.8% after 120 days.
TD Bank only offers a rate of 0. 05% for an account exceeding $5,000 and 1% for another account exceeding $10,000. Royal Bank only offers 0.8% and Bank of Montreal only 1%.
Macmillan said if more savers decided to switch their accounts to alternative companies, the pressure would be heavier on the shoulders of the major players.
If more Canadians more comfortable shopping or transferring their account, five or six major banks will begin to feel the pressure of competition and raise their own rates.
But banks aren't on the hunt for new customers as Canadians have made significant savings during the pandemic.
Banks aren't short on cash and liquidity. The level of deposits remains high, said Carl De Souza, senior vice president at the rating agency DBRS Morningstar. There is less pressure to raise savings rates, unless deposits are suddenly in decline or a competitor raises its own rates.
Mr. De Souza notes that if savings cooperatives offer higher rates, it is because they were created to serve their members and not to allow shareholders to make a profit. However, consumers are still hesitant to make a choice.
Some may not want to put money in cooperative banks despite the higher interest rates because that they believe they represent a greater risk than the big banks.