The Impact of Interest Rates on Guaranteed Interest Certificates (GICs)
On September 6th, 2017, the Bank of Canada surprisingly announced a second interest rate increase; the first occurring earlier this year in July. The overnight lending rate is now at 1.0%, which is what it was back in 2015 when rates were cut in response to a drop in oil prices.
Investors may assume that, in response to the interest rate increase, the rates of their Guaranteed Interest Certificates (GIC) would automatically increase by the same amount (25 basis points or bps, as mentioned by the Bank of Canada), since the mortgage rates and other lines of credit almost immediately jumped by the same percentage. Unfortunately, those investors who have GICs in their portfolio did not see an immediate 25bps change in their rates. Financial institutions did increase rates, but it was not by the same amount.
The Bank of Canada has a targeted inflation rate of 2.0%, with non-redeemable interest rates from the big five banks ranging from 0.55% to 1.7%. All fall below the targeted inflationary rate set by the Bank of Canada, which means your investments are worth less tomorrow compared to today.
Increases in interest rates are meant to cool the market and help keep inflation in check. Investors should review their investments regularly and strive to maintain a diversified portfolio that may include GICs, but should also be comprised of fixed income investments such as bonds and of course equities.