Interest Rate Increase?

Will Interest Rates Ever Rise?

October 2014

Recently a client told me about a Guaranteed Investment Certificate (GIC) they had maturing, it paid 6%! With interest rates at historic lows we would be lucky if we can find a replacement GIC that pays half as much.

Interest rates have been at record lows for a few years now. Many folks are wondering will rates ever rise? Specifically those that prefer guaranteed investments. Low rates have significantly reduced the benefits of those strategies. In an effort to encourage companies to expand, consumers to spend and to generally stimulate growth in the economy the Bank of Canada has kept rates low. They are not alone; central banks around the globe have done the same. In fact the European Central Bank is the first central bank in the world to use a negative deposit rate. While low mortgage and loan rates can be beneficial a drop in interest for GIC and term deposits can create problems. For low risk investors trying to accumulate savings the significant drop in rates means their savings grow at a slower pace and they have to add more or invest for longer to compensate. In addition some retirees use the interest from guaranteed investments as income to supplement their retirement and the drop in rates lowers their income. Many low risk investors have used GIC or term deposits as a safe haven a way to avoid the volatility of the stock markets. The drop in rates puts low risk investors in a tough spot, either accept a lower return or take a bit of risk and step into the stock market.

Low rates are often viewed as a temporary measure and the common thought is eventually they will go up, back to a normal level. I have heard that message many times. Unfortunately I think it is misguided. In July the governor of the Bank of Canada, Stephen Poloz, stated that rates will remain low in support of the economy as long as needed. When they do eventually rise, Mr. Poloz indicated that the general level of interest rates will still be lower than in the past. A senior deputy of the Bank of Canada repeated this message last week. In line with those comments most economists expect rates in Canada to move up in the second half of 2015; however the increases are expected to be small. Low rates are here to stay. We are unlikely to see a 6% GIC in the near future.

If rates are stuck near historic lows that means there is no easy solution for low risk investors. Their expectations and strategies need to adjust. For folks who typically use GICs I encourage them to consider adding a small piece of their portfolio to the stock market, the difference in growth over a few years can be significant. In addition many financial firms have created variations on GICs that provide a principal guarantee while allowing investors to benefit from market growth. While having a portion of your portfolio in guaranteed investments is still prudent, I believe a balanced portfolio including alternative investments and some stock market exposure is worth considering. The additional asset classes can help to compensate for lower return on GICs.

Clinton Orr B.Comm (hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.


This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.