Will nothing save Canada’s savers from low-interest-rate purgatory?

Just six months ago, returns on guaranteed investment certificates and high-rate savings accounts were edging higher and there was a sense of more to come. Then came the Big Fizzle.

Optimism about growth and concern about inflation was, in a matter of a month or two, replaced by the reduced expectations that have for about a decade defined our economic outlook. Savers and conservative investors, higher rates are not coming to your rescue any time soon. You’re better off planning as if rates could fall further.

Borrowers, be they individuals or governments, benefit tremendously from a more subdued rate outlook. This country’s economic stability depends more on keeping rates low for people with mortgages and lines of credit than it does on savers getting a decent return.

How this must rankle savers and investors who are willing to accept a subdued return in exchange for less risk of losing money. This group includes everyone from millennials saving for a house down payment to seniors trying to protect their retirement savings against the kind of stock market declines we saw at the end of 2018.

Returns on government bonds tell the sad story on rates – the yield on a five-year government bond has fallen to around 1.8 per cent from 2.48 per cent last October. GIC rates were slow in matching this move higher last year, and they’ve just started to follow the decline in bond yields.

Last fall, I wrote about how the online banks Tangerine and Simplii Financial were leading the market with one-year rates of 3.1 per cent. Tangerine had slid back to 2.8 per cent as of mid-February, while Simplii was hanging in at 3 per cent. You could still get 3.1 per cent at EQ Bank, Hubert Financial, Oaken Financial and some credit unions.

If you can afford to lock money in for a year, give these GICs a look. The inflation rate was 2 per cent in December, so you’re actually making money with a 3-per-cent return. And that’s a risk-free return, if you stick to deposit insurance limits ($100,000 in combined principal and interest for GICs covered by Canada Deposit Insurance Corp.).

The benefit you get in GIC-land for locking money in for three to five years is modest – three-year GICs top out around 3.35 per cent and five-year GICs around 3.6 per cent.

You can fall into a market-timing trap with GICs just as easily as you can with stocks, so be careful about going all-in with a bet that rates will rise or fall in the next few years. Bet too heavily on a one-year GIC and you’ll find yourself forced to renew a big chunk of money at lower rates. Lock in for five years and there’s a risk that you miss out on higher rates a couple of years down the line.

As ever, the safe approach is a GIC ladder. Standard procedure: Divide your money into five even pieces and invest in GICs with terms of one through five years. As a GIC in your ladder matures, you invest the money in a new five-year GIC. Given the slim reward for extending your term out five years, a three-year ladder also makes sense these days.

Falling interest rates have yet to cause much of a ripple in the returns from high-rate savings accounts. You can still get something in the area of 2.3 per cent to 2.5 per cent from a wide variety of alternative players, while the big banks are clustered around 1 per cent or so.

Motive Financial, an online bank operated by Canadian Western Bank, has introduced a savings account paying 2.8 per cent (Motive Savvy Savings Account) as of mid-February. Watch for fees, though. You get two free transactions other than deposits each month and then there’s a charge of $5 each.

Competition is alive and well in high-rate savings accounts. But unless things pick up in the economy, the drama ahead for savers will be waiting to see which banks crack first and lower their rates.

The Globe and Mail, February 14, 2019