Interest Rates

The big banks just hiked their prime rates, but savings account rates barely budge

By: Jessica Mach on July 12, 2018

Canada’s major banks all raised their prime lending rates to 3.7%, announcing the move only a few hours after the Bank of Canada (BoC) hiked its overnight interest rate on Wednesday to 1.5% — its highest level since the 2009 recession.

The prime lending rate, which is the benchmark rate against which banks offer all loan types — including student loans, car loans, and mortgages — to customers with the best credit histories, was adjusted at BMO, CIBC, National Bank, Scotiabank, RBC, and TD. The new rate came into effect Thursday.

Why did the banks all make this move at the same time? Consumer-facing banks — i.e., banks that offer services to you or me, like the ones listed above — lend to individual consumers, but they themselves need to borrow money as well. That’s where the BoC steps in.

Like banks when they lend to us, the BoC tacks interest onto any loans it gives out to banks. That means that when the BoC raises its overnight interest rate, it costs banks like BMO or CIBC more money to borrow at the overnight rate (the overnight market is where short-term loans are made for banks that need the liquidity). To make up for these added costs, banks then start charging their customers more interest for certain loans.

No one with a variable-rate loan likes to hear that interest rates have gone up. Unlike fixed-rate loans, where the amount of interest you pay stays the same throughout the length of a repayment term, variable-rate loans change with the market. They’re therefore especially sensitive to any rate changes the BoC makes, and anyone who’s currently repaying a variable-rate loan from a major Canadian bank is likely going to be making bigger payments starting Thursday.

But, rising interest rates are not totally bad. People who would benefit from higher interest rates are those who hold any type of bank account that accrues interest. That includes most savings accounts, like a Tax-Free Savings Account or a High Interest Savings Account, as well as some chequing accounts.

Unfortunately, in order for these customers to see the benefits of higher rates, banks have to actually increase the rates at which people can accrue interest.

And, long story short — they haven’t been increasing them very quickly at all. Since the beginning of 2017, the BoC has hiked rates four times — gradually increasing it from 0.5% to its current 1.5%. Within that same time frame, the country’s major banks have also increased their interest rates to yes, make up for the borrowing costs that they are now facing from the BoC. But, those rate increases are also likely generating more income. So why aren’t customers with savings accounts seeing that money?

After the BoC hiked its overnight rate last September, noted that the major banks had not adjusted their savings rates since at least July 2017. As of September, the interest you could accrue on a high interest savings account capped at a paltry 0.5%.

That number has not budged much. The best options for standard savings accounts at CIBC, National Bank, Scotiabank, and TD offer interest rates of 0.9%. BMO and RBC offer slightly better rates — 1.4% and 1%, respectively.

So, what should you do? We’ll leave you with the same advice we gave you last year: since the banks aren’t likely to offer you a fair rate on your savings accounts anytime soon, it might be best to explore options for other places where you can park your savings — and accrue decent interest.