Why are savings account interest rates stagnating?

As the Bank of Canada's policy rate hit 4.5%, major Canadian banks are offering a Basic Savings Account with rates ranging from 0.01% and 0.03%.

As central banks continue to raise their rates to fight inflation, savings products are struggling to become attractive again in Canada.

Anyone with a mortgage will have noticed that it has become much more expensive to borrow money in recent months. Banks were quick to pass on rate hikes prompted by the Bank of Canada to curb inflation to their customers. However, this rise in rates did not raise the interest of savings products.

In fact, savings accounts pay little more today than they did a year ago, when the Bank of Canada's lending rate was 0.25% , the lowest level ever recorded.

For example, the five largest banks in Canada offer a basic savings account whose rate varies between 0.01% and 0.03%. Saving $1,000 for a year will therefore earn at most 10 to 35 cents in interest.

Even so-called high-interest savings accounts, which are tied to minimum balances, earn less than 2% over a year.

In this two-tier banking environment, customers remain keenly aware of the rate gap between the money they owe and what they can save, says Natasha Macmillan, director of day-to-day banking at the comparison website Ratehub.ca rates.

As soon as the Bank of Canada raises its interest rate, we see that translate immediately to the borrowing side, she explains to CBC. But it takes a bit longer for that to trickle down to the high-interest savings side — not quite as quickly [and] not quite at the same pace.

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The current rate spread has never been so lucrative for banks. In 1981, when Canada's inflation rate peaked at over 12%, savings accounts were earning 19% interest. In 1990, when the inflation rate was around 5%, savings accounts were earning almost double.

There are several reasons for the gap between borrowing and savings interest rates in 2023, says Claire Célérier, professor of finance at the University of Toronto's Rotman School of Business.

The major banks have hundreds of billions of dollars in deposits in their coffers, according to quarterly results released this week.

Claire Célérier, Associate Professor of Finance at the University of Toronto

While banks are themselves subject to higher borrowing costs, customer deposits make up around two-thirds of their funding source. In the current environment, since they have enough funds to meet their needs, they have little interest in trying to convince people to give them more.

“[Banks] are not stressed about having access to more funds. »

— Claire Célérier, professor of finance at the University of Toronto

The mortgage market is slowing, so they don't need more funds to fund more mortgages, Ms. Célérier said.

The main reason why interest rates Interest in savings accounts aren't growing as fast or as high is explained by customers' reluctance to switch banks, a phenomenon economists call market stickiness, the finance professor continues.

Most Canadians prefer to put their money in a bank they know, trust, so many don't bother looking for higher interest rates, he said. her.

This observation is confirmed by testimonials that CBC has collected among Torontonians. I never really thought about it, I just assumed it was like that, admits Kumbo Mwanangonze about the low interest rate he gets on his account ;saving. I never really considered my savings account as a way to generate extra money, he shares.

Also challenged on the subject, Josh Chan says that disinterested customers are partly responsible for the situation by their complacency, but he considers that ultimately there is not enough competition for the savings in general. I don't think it's a monopoly, but there's definitely not enough choice, he notes.

Jennie Darnley worked at one of the big banks, a job she says made her realize how difficult these institutions make it to change banks. You're supposed to invest your most valuable assets in these banks and trust them, but I'm not sure if they have the public interest in mind, she acknowledges.

In summary, the onus is on customers to shop around for better deals when they can, because the status quo enriches the profit-making banks by not passing on the rise interest rates, notes Claire Célérier.

“When the level of interest rates on a savings account is lower than inflation, people lose money and savings melt away. »

— Claire Célérier, professor of finance at the University of Toronto

Called on the fact that savings have not benefited from the general rise in rates, Royal Bank, TD Bank, CIBC, Scotiabank and Bank of Montreal all responded with the same message: their rates are calculated from a variety of funding costs, and although savings account rates are competitive, clients can often get higher rates with products like Guaranteed Investment Certificate (GIC) Rates for higher-yielding investments on amounts unreachable for a fixed term.

Based on information from Pete Evans and Nisha Patel, CBC