With inflation above eight percent, anyone with money in the bank is seeing their savings erode at the fastest rate on record because savings account rates, which are still largely languishing around 1 percent, are not they have kept up.
“They will lose money.  The value of their savings is declining,” said Claire Celerier, an associate professor of economics at the University of Toronto’s Rotman School of Management.
It’s a stark contrast to the last time inflation was this hot.  In 1981, inflation peaked at over 12 per cent, but Statistics Canada figures say bank accounts were paying 19 per cent interest, and even in 1990, when inflation was just under 5 per cent, bills were paying over nine percent.
There are several reasons for the lag, but part of the problem is the concentration of Canada’s banking sector, Celerier said.
“When there is less competition between banks, then it takes longer for them to adjust interest rates on deposit accounts.”
Banks simply don’t have much incentive to change interest rates unless they have to, he said.
“When banks don’t raise interest rates on deposits, they make more profit… It’s a very easy way to make a profit, to have a low interest rate on deposit accounts.”
Part of what drove interest rates higher in the early 1980s was the introduction of money market mutual funds, providing a competitive alternative to bank accounts for average savers.
There are a growing number of online banks and credit unions with competitive interest rates.  After the Bank of Canada raised its key rate by one percentage point in July, Oaken Financial raised its rate from 1.65% to 2.25%, while Duca Credit Union raised its rate from 3.1% to 3. 25%, said Natasha Macmillan.  , Ratehub.ca’s director of everyday banking.
However, Canadians don’t tend to switch banks very often.  An Accenture survey from 2020 found that less than 4 percent of consumers said they changed their primary bank account in the last year.
Some banks have also started raising interest rates, though often through short-term promotions and other restrictions, and not across the board.
“Banks are very quick to pass on higher interest rates on the lending side, but they are much slower to do so for those looking to save,” Macmillan said.
Scotiabank is offering a temporary rate of up to 4.05 per cent thanks to several time-limited bonuses (some linked to new deposits) on top of the regular rate of 1.35 per cent.  CIBC is offering a rate of up to 3.55 per cent which then drops to 0.8 per cent after 120 days, down from February’s 1.5 per cent offer rate which was reduced to 0.3 per cent.
TD Bank, meanwhile, offers 0.05 percent interest on balances over $5,000 for its high-interest savings account (it offers a separate account that pays one percent on balances over $10,000), RBC offers 0.8 percent for the high-interest account, and BMO has a one percent savings option.
Macmillan said more people moving to alternative lenders could put more pressure on the big players.
“As more Canadians feel more comfortable shopping around or moving to a bank that they may not recognize as much, the big five, big six banks will start to feel that competitive pressure and increasingly start to change their interest rates accordingly ».
But part of the challenge is that banks aren’t as desperate for deposits after Canadians saw savings swell during the pandemic.
“Banks right now are flush with cash and liquidity and their deposit levels are still high,” said Carl De Souza, senior vice president of North American financial institutions at DBRS Morningstar.
“So there is less pressure to raise the deposit rate unless deposits start to decline dramatically or a competitor raises rates.”
De Souza noted that credit unions offer higher interest rates, in part because they are designed to serve members and not just make a profit for shareholders like banks, but that there is still some reluctance among consumers.
“Some people may not want to put money in credit unions because they see them as riskier than big banks, despite the higher interest rates these credit unions pay.”
Many credit unions, however, also haven’t raised rates much.  Vancity still offers 0.75% interest on its main accounts, and also doesn’t have a strong need for more deposits, said chief financial officer Clayton Buckingham.
“Really the way we set rates is looking at the overall funding needs for the organization.”
Higher customer deposits helped meet higher loan demand and limited the credit union’s need for more capital, but that could change if the market changes more, Buckingham said.
“It comes in the competitive market.  That’s driving the majority of the moves, so if rates are going up at the rest of the banks and credit unions out there, then we have to follow suit.”
He said customers are turning instead to Vancity’s time deposits, which are similar to a certificate of guaranteed investment.  The products, which are more closely linked to bond rates, have risen much faster than deposit rates, with some institutions offering rates of more than 5 percent for long-term commitments.
Buckingham noted that it is also early for inflation in general with huge uncertainty ahead, so financial institutions are proceeding cautiously.  If deposits continue to track as people dip into their savings to meet rising costs, then financial institutions may need to raise interest rates to attract deposits, but if loan demand falls due to economic concerns, then lenders may not need so much funds.
“We’re just seeing an initial impact of what can happen in the high inflation environment…for now, everyone is still figuring that out.”
This report by The Canadian Press was first published on July 31, 2022.