Mark down June 5 as the date everything changes for interest rates.
It’s not a certainty that the Bank of Canada will lower its trendsetting overnight rate on that date, but weak economic numbers make it very likely. Rates on floating rate debt such as credit lines and variable-rate mortgages would immediately fall, and so would a variety of rates for savers and investors. For now, though, people with money to save or invest can benefit from a last gasp of high rates.
Online bank Tangerine is offering 5 per cent for guaranteed investment certificates with terms of three, four and five years. If you prefer a guaranteed 5 per cent over what stocks and bonds may provide, don’t delay. The financial market forces that helped produce this offer from Tangerine are already receding.
Tangerine’s current GIC rate structure attests to the weirdness of the interest-rate landscape today. A one-year term pays 5.2 per cent, which is quite competitive. Two years gets you 3.6 per cent, which is lame in comparison to the 5 per cent or more available from several alternative banks. The 5-per-cent return for terms of three through five years is top of the market by a fair margin unless you deal with a GIC broker. Note: The best rates available through GIC brokers may require a high minimum investment.
GIC rates are influenced in part by interest rates in the bond market, which lurched higher in late April because of concerns about inflation. Bond yields have come back down a bit recently, which means there’s little impetus for GIC issuers to up their rates right now unless they have a specific agenda like attracting money for mortgage lending.
Even there, the rationale for higher GIC rates is uncertain. Some local real estate markets are thriving, others less so. The theory is that some buyers are waiting for lower mortgage rates, a development that could actually harm affordability by spurring demand and pushing prices higher.
Stocks have been strong lately and, over a five-year period, could very well outperform a 5 per cent GIC. But if you adjust for stock market risk, 5 per cent may look appealing. This is especially true in a tax-free savings account, where you sidestep the reality that GIC interest is taxed like regular income.
A drop in the Bank of Canada’s overnight rate does not mean automatic cuts in GIC rates. But a lower overnight rate sends a strong signal that we will finally see at least a partial unwinding of the big rate hikes of 2022-23. It could be a long time until 5 per cent GICs come around again.
Rob Carrick