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Bank of Canada Governor Mark Carney (BLAIR GABLE/REUTERS)
Bank of Canada Governor Mark Carney (BLAIR GABLE/REUTERS)


Waiting for savings rate to rise with prime? Add to ...

Supposedly, interest rates are going up.

Borrowing costs did in fact rise last week as banks increased their prime rate by the same amount as the Bank of Canada raised its trendsetting overnight rate. But on the savings account side of the equation, it's so quiet you can hear the crickets chirping.

That's actually a better result than we've had with bonds and guaranteed investment certificates. Their returns have actually fallen in the past couple of weeks.

You sometimes hear interest rates spoken about as if they're a single cohesive thing, but that's an oversimplification that leaves people confused and frustrated. So let's wise you up on rate intricacies.

Last week, the Bank of Canada raised what's known as the overnight rate by one-quarter of a percentage point. The overnight rate means nothing in everyday life. Rather, it's a reference rate that essentially says: Yo, everyone, Canadian interest rates are on the way up.

Serge Pepin, head of investments for BMO Investments, said the overnight rate has a direct impact on some aspects of saving and borrowing, and a trickle-down effect on others.

"The Bank of Canada can only do so much," Mr. Pepin said.

For individuals, the overnight rate has the most direct impact on the prime rate that banks and others use as a base rate for their most creditworthy customers. Variable-rate mortgage and credit lines are priced directly off prime, which means the quarter-point rise in the overnight rate immediately flowed through to a quarter-point increase in your borrowing costs (this may be invisible to you, but it happened).

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On almost every other front, the rising rate trend initiated by the central bank just isn't happening yet. In fact, just the opposite is happening in some cases.

"Yields have come down quite a bit in the past few weeks and a lot of it has to do with the financial situation in Europe more than anything else," Mr. Pepin said.

The debt problems of Greece and other countries have shaken the global stock markets, which in turn has caused investors to take money out of stocks and put it in Canadian and U.S. government-issued Treasury Bills and bonds. Rising demand for T-bills and bonds has pushed prices higher, and that sends yields lower (prices and yields move oppositely).

Check out one-month T-bills issued by the federal government - the yield was 0.26 per cent on Friday, down from 0.29 per cent on June 1, the day the overnight rate moved higher.

Normally, Mr. Pepin said, a rising overnight rate puts upward pressure on short-term interest rates like those on T-bills and the short-term borrowings that corporations use to fund their operations.

T-bills and short-term corporate borrowings account for most of the holdings in money market mutual funds, Mr. Pepin noted. So at some point we can expect a modest uptick in the returns from money market funds as their current holdings mature and they buy new ones paying a little more.

Note that money market funds have been paying out pretty much nothing in the past year or so. That's partly because rates are so low, and partly because money market fund fees are so fat.

Interest rates paid on high-rate savings accounts are also influenced by the overnight rate, but so far there hasn't been any action to speak of. As was the case before the Bank of Canada moved, the top rates are the 2.1 per cent paid by Peoples Trust and the 2 per cent paid by Ally and AcceleRate Financial. ING Direct, the big guy in high-rate savings accounts, has been at 1.2 per cent since last Dec. 15, though its tax-free savings account pays 2 per cent.

Returns on GICs and bonds are indirectly influenced by the Bank of Canada's actions. Much more of a factor are the outlooks for inflation and global stock markets. When stocks calm down and there's a feeling that economic growth is gaining momentum, bond yields will rise.

GICs take their cue from bonds, but not entirely. Mr. Pepin points out that there are also market forces at work here.

GICs are used to finance lending, notably mortgages. Banks that are eager to expand their lending might get aggressive with GIC rates, whereas more cautious banks are more likely to let rates languish.

Waiting for the return of the 5-per-cent GIC, last seen in these parts about three years ago (and then only from alternative banks)? Mr. Pepin offers a reminder that rates are at emergency lows now and have a ways to go before they reach normal levels.

"It's going to be a while before people see juicy rates again."

Where The Rates Are

The Bank of Canada started the next rising interest rate cycle last week when it raised its overnight rate, but returns on savings accounts and GICs are still extremely low. Here's a look at some of the best rates being offered.

High-Rate Savings Accounts

Five-Year GICs

People's Trust






Maxa Financial


AcceleRate Financial


M.R.S. Trust


Achieva Financial


ResMor Trust


Maxa Financial


SunLife Fncl Trust


Outlook Financial


AcceleRate Financial


Equitable Life


Manulife Bank


Outlook Financial


Source: Cannex

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