The vise is closing on savers.

After holding up nicely through the spring, interest rates on savings accounts and guaranteed investment certificates are on the decline. The timing couldn’t be worse for the people who will be pouring money into savings accounts in the months ahead.

“I’m expecting a surge into high rate savings accounts following the pandemic and economic crisis,” banking industry consultant David McVay said. “People are nervous about investing, particularly when the bulk of the money is with baby boomers and older. I expect more of a trend toward capital preservation and income over growth.”

The shifting dynamics of the savings market put more onus than ever before on people to stop acting out of habit in their banking and find the best deals. A 2-per-cent return on savings – not a temporary teaser rate, but a regular rate – was still available as of mid-June. But most bank savings rates were near zero, and many alternative players have chopped their rates as well.

The shift of money into safe parking spots began in March, when the total amount in savings and chequing accounts jumped 10.6 per cent on a year-over-year basis to $886-billion, according to Mr. McVay. Stocks rocketed back from the March crash, but the dramatic drop last week is a reminder that we aren’t done with volatility.

The aftermath of the 2008-09 financial crisis suggests a lot more money is headed into safe havens. Mr. McVay said deposits in savings and chequing accounts surged by 35 per cent in January, 2009, several months after stocks began falling.

If we see a similar lag in 2020, the flood of money into savings could peak months from now. What might rates look like by then? Maybe 1.5 per cent at best, Mr. McVay speculated. What we do know is that most banks will be far below that level.

Savings rates generally track the Bank of Canada’s overnight rate, which has been peeled back to 0.25 per cent from 1.75 per cent before the pandemic. But there are other factors that go into rate-setting, including a bank or credit union’s need for deposits that can be turned around and lent to customers via mortgages.

The website for the online bank Tangerine tells the sad story of falling rates for savers. The bank’s historical rates chart shows a gradual decline to 0.25 per cent from 1.1 per cent at the beginning of the year. The institutions at 2 per cent or slightly more as of June 15 were Bridgewater Bank, EQ Bank, LBC Digital (part of Laurentian Bank of Canada), MAXA Financial, Motive Financial and Peoples Trust.

GIC rates are falling fast as well. A small and declining number of banks, trusts and credit unions offer 2 per cent for one year and the best five-year rates were between 2 per cent and 2.3 per cent.

Mr. McVay said some banks are using temporary teaser rates to defend their market share in savings deposits. Example: Royal Bank of Canada will pay 2.25 per cent for three months and 1 per cent for three months thereafter when you open an RBC High Interest e-Savings Account. RBC’s base rate was 0.05 per cent.

If you’re willing to invest the time to surf for the best deals, then use these offers for sure. But only about 10 per cent to 20 per cent of an online bank’s clients were rate switchers before the pandemic, Mr. McVay said. You play right into a bank’s hands if you grab the teaser rate and then stick around after the rate falls to normal.

Another way banks offer a semblance of decent rates is with savings accounts that offer a weak base rate plus bonus rates if you make a deposit or at least don’t withdraw money. Example: Bank of Montreal’s Savings Builder Account, where the base rate is 0.05 per cent and there’s a bonus rate of up to 0.7 per cent when you add at least $200 a month to your balance.

Let’s be clear about savings – the rate of return is not as important as the mere fact that you have money put away safely for the unexpected. It is not a fail to earn little or nothing on your savings, just a missed opportunity to claw out a small advantage for yourself in these uncertain times.

The Globe and Mail, June 15, 2020