Amid a triple-whammy of rising interest rates, inflation and uncertainty, Canadians have socked away billions in the safe confines of guaranteed investment certificates this year, a sizable stockpile that could eventually be released back into the economy and markets.
Since March, when the Bank of Canada began raising its target overnight rate to counter mounting inflation, Canadians have pumped roughly $125-billion into fixed-term deposits like GICs at chartered banks.
One-year GICs are currently paying upwards of 5 per cent, though that’s still shy of Canada’s 6.9-per-cent inflation rate. And of the increase, most has been in non-tax sheltered accounts, meaning taxes will take a big bite. Unlike dividends, the interest income from GICs is fully taxed at an investor’s marginal tax rate.
Even so, Canadians have been drawn to the safety of GICs. Some of the GIC money is a holdover from the pandemic savings boom. Government stimulus and reduced spending meant chequing deposits at the banks swelled by nearly $200-billion from February, 2020, to this past summer. Since June, those deposit levels have dropped.
When Royal Bank reported its fourth-quarter results recently, it noted its clients had moved $25-billion into GICs over the past six months. “We have seen a very strong shift out of both core deposit accounts, saving accounts, but also retail investors coming out of mutual funds, just given market uncertainty, into GICs,” said Neil McLaughlin, Royal Bank’s head of personal and commercial banking.
Decoder is a weekly feature that unpacks an important economic chart.
Jason Kirby