Canadians were blindsided last week when the Bank of Canada announced it was cutting the interest rate to 0.75 per cent. Although most economists had been predicting a rate hike sometime in 2015, plummeting oil prices forced the hand of our central bank.
The Big Banks Stand Pat on Prime Rate
Reducing the overnight lending rate has a far-reaching impact that will be felt throughout the Canadian economy. The Bank of Canada’s hope is that lower interest rates will help jump start our stalling economy – but it’s a good news, bad news story for most Canadian consumers. Borrowers can expect to pay less on their debt repayments once the banks in turn cut their Prime rates (so far, RBC is the only lender to announce a Prime cut to 2.85 per cent, effective January 28) . While historically, banks have taken only days to cut Prime after a rate cut, no one has made a move yet. In fact, TD Bank has already publically announced it will not be lowering its prime rate in response to this month’s rate announcement.
UPDATE: Effective Wednesday, January 28, all of Canada’s big banks – RBC, TD, BMO, Scotiabank, National Bank and CIBC – have cut their Prime rate by 15 basis points to 2.85 per cent.
But taking a slow start on Prime hasn’t stopped two of the big banks from lowering their saving rates, less than 24 hours after the Bank of Canada’s announcement.
RBC was the first of the big banks to lower its savings interest rates. In fact, it sent out a note the very same day announcing it would be cutting rates on the Investment Savings Account by 0.25 per cent, matching the cut in interest rates by the Bank of Canada. Not to shy away from the spotlight, TD cut rates on some of its savings accounts as well.
Savings Rates vs. Prime Rate
The decision to cut the Prime rate isn’t as simple as it would seem. While lowering saving account rates affects just one product, lowering Prime has a widespread effect. A lower rate affects many products, including variable rate mortgages, lines of credit and even commercial banking.
While it probably isn’t a good move from the public’s perception to stand pat on the Prime rate, Canadians have little choice if no lender is willing to step up to the plate and discount theirs.
Alternatives for Savers
The low interest rate environment is challenging if you’re looking for a place to park your money and earn a decent return. Two key factors in deciding on the right type of investment is your time horizon and risk tolerance.
If you need the money in the short term (less than five years), you’re better off with stable investments like savings accounts and GICs. If you’re saving for a long-term goal like retirement, you’re better off parking your money in an investment that earns a decent return like low-cost ETFS or mutual funds.
Even with the paltry savings rates these days, there are still some strategies you can use to boost your returns. One of those is GIC laddering, when you buy into several GICs with one timed to mature each year. That way you you’re not stuck locking up all your money in for the long-term at rock bottom interest rates.
Also read: What is a GIC?>
With another rate cut perhaps on the horizon sometime in 2015, it will be interesting to see if the big banks still remain silent on rate cuts, despite the public backslash that will surely ensue.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/