The Bank of Canada's first rate hike in roughly seven years wasn't enough to push the interest large banks pay on deposits higher, and savers might be unwise to hold their breath awaiting better returns.
While variable rates on some mortgages and loans immediately jumped a quarter percentage point higher, in sync with the central bank's increase, interest rates offered to customers on deposits in high interest savings accounts and guaranteed investment certificates (GICs) haven't budged.
To some observers, the simple explanation is that banks are quicker to pass along rate hikes on products from which they earn money than on those that pay out interest to customers. But the factors banks consider when calculating deposit rates are varied. And while there is some correlation to Bank of Canada rates, competitive dynamics and a bank's own funding needs weigh more heavily in the equation.
"Deposits are a weird combination of underlying economics, but also promotions and making sure that the banks have the amounts of deposits that they're looking for," said James Laird, president of CanWise Financial and co-founder of Ratehub.ca.
Most big banks declined to discuss their pricing strategies in detail. But Royal Bank of Canada spokeswoman Catherine Hudon said the variables the bank considers include "competitive pressures, our cost of funds, regulatory costs and market volatility."
The Bank of Nova Scotia noted that the central bank's rate hike is only one of several factors to consider. Scotiabank uses "a variety of market benchmarks to set rates for both borrowing and deposit products, and those rates don't always move in the same ways and at the same time," said spokeswoman Allison Watkin.
Competitive factors have also been skewed by the fact that troubled mortgage lender Home Capital Group Inc., which suffered a run on its deposits in the spring, has been eager to lure some of that lost money back with more generous offers. One subsidiary, Oaken Financial, pays 3.25 per cent interest on a five-year GIC, paid annually, or roughly double what many big banks offer.
Even then, the big banks didn't respond. "They felt no pressure. Everyone in the marketplace understood why Oaken had to increase their rates so aggressively," Mr. Laird said.
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. And as long as deposits continue to flow in, there is little incentive to move. As of April 30, average domestic deposits were up between 8 per cent and 11 per cent at four of Canada's five largest banks, compared with a year earlier. Average domestic deposits at Scotiabank rose 4 per cent over the same period.
At the same time, Canada's household saving rate – the ratio between net saving and disposable income among households – dipped to its lowest level in more than two years, at 4.3 per cent.
A spokeswoman for Toronto-Dominion Bank, Erin Sufrin, said the rationale for such decisions is confidential and proprietary, but that "deposit rates vary by savings product."
Representatives of Bank of Montreal and Canadian Imperial Bank of Commerce declined to comment.
The phenomenon isn't unique to Canada. The U.S. Federal Reserve has hiked its benchmark rate four times since December 2015, yet interest rates on deposits at American banks have mostly remained stubbornly low.
If the U.S. experience is any indication, it's not the Bank of Canada that would drive returns on savings higher in the short term, but rather a change in the competitive landscape.
"If none of their competitors move, and they're receiving the amount of deposit money that they ought to, there's really no pressure to pass along these higher rates to depositors," Mr. Laird said.