Well, interest rates have been rising over the past two months, as the Bank of Canada has increased the overnight rate by 0.50% since the beginning of June. As a result, Canadian’s have had their variable mortgage rates go up by the same amount, while fixed mortgage rates have stayed relatively level or even dropped slightly during that time (although this is due to government bond yields rather than interest rates). View more details on fixed versus variable mortgage rates. But what has this meant for GIC rates? And what influences GIC rates?
Ally Bank has had the highest 5 year GIC rate for awhile now, and has been advertising it heavily, and it was at 4% for the longest while. I checked our latest GIC rates page today and saw that their 5 year GIC rate dropped by 0.25% earlier this week to 3.75% while their 2 year GIC rate increased by 0.05% to 2.65%. So what’s the reasoning behind this?
What affects GIC rates?
The Globe and Mail’s Rob Carrick wrote an article on this last month. He interviewed BMO’s head of investments and they outlined that GIC rates are influenced:
- Returns on GICs and bonds are indirectly influenced by the Bank of Canada’s actions, a greater factor is the outlook for inflation and international stock markets
- When stocks calm down and there’s a feeling that economic growth is gaining momentum, bond prices will drop, and bond yields will rise
- GICs take their cue from bonds, but not entirely, as there are also market forces at work here
- GICs are used to finance lending, notably mortgages. So you offer a 2 year GIC rate at 2.65%,get in a bunch of deposits, and then loan out 2 year mortgages at 3.65% and you have your spread or profit margin
- At any point, banks and other lenders that are keen to expand their lending might get aggressive with GIC rates, whereas more cautious banks are more likely to let rates languish
- This can result in quite a wide variance in GIC rates
Today’s bond yields
If we take a look at the 5 year Government of Canada bond yield, it’s currently down 2.45% just today (July 29, 2010 at 11.15am). This is due to a lower earnings reports from Canadian companies and GDP data from Canada and the US, while global markets were also not doing well, as stocks in Asia and Europe are lower on economic worries.
These national and global economic worries could be the main driver on why we’ve seen longer term best GIC rates fall this week, and if things continue this way, and there is continued talk of a double dip recession still occurring, then we could be in for a lower GIC rates in the near future.