We explore the future of GIC Rates…
What has happened to GIC rates recently?For this article we’ll take you back to 2015, when most of the financial specialists were saying that the interest rates on Guaranteed Investment Certificates (GICs) would increase in the ensuing months. This was because they thought it was likely that the Bank of Canada and the US Federal Reserve would raise interest rates around that time due to fears of pent-up inflationary forces in the two countries. The US reacted as expected and ultimately increased its standard rate. However, the BOC took the opposite track and slashed the interest rate—twice—so as to enhance Canada’s declining economic growth. As a result, GIC rates fell in the following 24 months. According to the Bank of Canada, in May 2015, interest rates on one-year GICs were, on average, 0.88%. Unfortunately, by April of this year, that rate had declined by 17 percentage points to a dismal 0.73%. Likewise, five-year GICs fell from 1.5% two years ago to 1.13% in April 2017. One would think that these specialists would hesitate to forecast a rate increase given the fate of GICs over the last two years. Surprisingly, these specialists are once again predicting that interest rates will go higher. It’s important to look at how these experts made that deduction in order to determine whether their advice is sound or not.
What is a GIC?A guaranteed investment certificate is a very conservative vehicle, purchased for a set amount of time. After the time elapses, the investor gets back his or her principal with some interest. As a result, there’s never a huge payday when an investor cashes in a GIC. However, the great thing about this investment is that it’s guaranteed, so investors don’t have to worry about losing their principal. If you had invested in something else, and interest rates had fallen, you would have been at a disadvantage, because you would have received a smaller return. On the other hand, if rates had risen, you would have won since other investments would now be worth more than GICs. That’s why it’s so important to look at the direction in which rates are trending.
What is the future of GIC rates?The BOC has a target of 0.5% for overnight interest rates at the moment, which is an unusually low level. Although the BOC slashed that rate twice in 2015, financial specialists are still of the opinion that Canada’s regulatory authority is thinking about raising rates. The lower taxes and looser regulations that form US President Donald Trump’s policy agenda are clearly intended to improve growth of that country’s GDP. On the other hand, if this agenda is successful, greater economic growth will force the U.S. Federal Reserve System to boost interest rates in order to counteract possible price increases. The Federal Reserve already increased interest rates once for 2016, and financial specialists think that it can happen twice again in 2017. If this happens, it can crush our local currency, forcing the central bank to increase our rates so as to safeguard the value of the loonie. The reasoning behind a hike in Canadian interest rates is simple:
- It will keep GICs competitive compared to other types of investment, and
- It will ensure that the loonie keeps its value in comparison to the US dollar.