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Will recent rate hikes mean better interest for savings accounts?

September 24th, 2017  |  Personal Finance

This past July, the Bank of Canada raised its key interest rate to 0.75 per cent. This was the very first hike in seven years. Then, the Bank of Canada raised its key interest rate by another quarter of a percentage point to 1 percent in September. This surprised many, including the banks. Most of the big banks had been expecting governor Stephen Poloz to wait until October before introducing the second increase. But, he did not wait.

So what does this mean to Canadians?

For starters, the hike in interest rate is not a bad thing. It means economic growth is picking up in Canada. Hooray! But make no mistake: a huge portion of Canada’s population will struggle with the raise in interest rate. Debt, my friends. Canadians with debt will suffer.

After the Bank’s announcement, all five major Canadian banks announced they were increasing their prime rates — the rate they use to set interest rates for variable-rate mortgages and other loans — to 2.95 per cent from 2.7 per cent. Sadly, thirty per cent of mortgages in Canada do not carry a fixed interest rate. Additionally, the hike in interest rate will also affect home equity lines of credit and other loans linked to the Big Bank prime rates. Furthermore, student loan interest will hike up as well. Depressing, I know.

So now that banks are charging higher interest rates on borrowed money, surely savings accounts will produce more interest. Right? Not so fast.

Even with the government raising the interest rate, the banks may not pass on any of that increase to their customers. The Bank of Canada’s first hike in seven years was not enough to push the interest large banks pay on their savings account according to this globe and mail article. Thus far nothing has come of the latest rate hike.

As of now, that means rates on your savings accounts will still remain near rock bottom. Surprised? Don’t be. Banks are a business and their primary goal is to make sure their shareholders are happy. Then, come the customers. Delaying increases to deposit rates can bolster banks' profits by widening the margin between their cost to borrow funds and the return they earn on loans, which has been tighter in a low-rate environment. Plus, as long as the deposits continue to flow in, banks have zero incentive to make a change.

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