December 12, 2009
Banks generally adjust their deposit (savings) account interest rates along with their borrowing (loans and mortgages) interest rates as the Bank of Canada adjusts the country's prime rate (currently, 4.75%).
The banks are currently suffering through what's termed "spread compression". That is, when the difference between their borrowing rates and their deposit rates shrinks. If a bank is paying 3% on customer deposits but lending at say, 5%, then their spread is only 2% - before financing costs. However, remember that banks generally derive the majority of their revenues from interest rate spread which means when there is "spread compression", it pinches profits quite dramatically leaving them with less after paying all of their expenses. For the "virtual banks" that are branchless or nearly-branchless, they have less overhead and don't have to pay for branches and all that so they can afford to pay a bit more. Still, though, they do have expenses and we really just have to accept that.
Frankly, I'd rather give up a percent to interest rate spread than be dinged with all kinds of service charges, considered non-interest revenue to banks.
So, to answer your question, when the Bank of Canada raises the prime rate, the interest rates will move upward. Hope that helps! 🙂
Given our retirment savings is intended to be long-term, I always look to maximize my returns through laddering my RSP investments within high-rate GIC offers. Essentially if I had $15,000 to invest, I'd invest $5,000 in a 1 yr GIC, $5,000 in a 3 yr GIC and $5,000 in a 5 yr GIC. Should rates begin to rise, I will always have some of my retirement savings coming up for maturity, which I'd simply re-invest within the best rates available.
Over the past several years, I have moved much of my RSP savings, other than some longer-term bonds, to Achieva Financial http://www.achieva.mb.ca . They have consistently had some of the best interest rates available (current 5 yr GIC is 4.75%, 3 yr is 4.45%) for 100% guaranteed fixed term savings. I manage my account online with Achieva, simply investing my funds as I see fit.
As for interest rates rising...I have been waiting for three years! If I would have stayed invested simply in a variable account, I would have lost thousands in earnings that can never be made-up!