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Buckle up – 6.00% GICs may be coming

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Well, well, well! On Wednesday July 12, 2023, the Bank of Canada raised its key interest rate to a whopping 5%. Can you believe it? This is the 10th rate hike since March 2022. It seems like the central bank is on a mission to cool down our overheated economy. I guess the economists saw this coming, what with the strong job growth and persistent inflationary pressures. But here’s the million-dollar question: will there be more hikes in the future? Nobody seems to know for sure. You see, the effects of interest rate hikes don’t happen overnight.

It’s like watching a slow-motion movie, and right now, the bank is playing it safe by closely monitoring the situation. Of course, these rate hikes have also sparked a fiery debate about their impact on inflation. Some people are scratching their heads, wondering why the bank is raising rates, when inflation is close to its target range.

GIC rates going up

6.00% GICs may be coming. Buckle up the interest rates on GICs are soaring to new heights, with a possibility of hitting multi-decade highs this summer.

Bond yield impact on GIC rates

As bond yields continue to rise, there’s a strong link with GIC rates. Bond yields represent the interest rates on government-issued bonds, and as these rates go up, financial institutions offering GICs usually follow suit. The recent surge in bond yields is driven by various factors, including expectations of economic recovery and concerns about inflation. This surge in bond yields has the potential to impact GIC rates, as financial institutions might raise their rates to attract investors seeking higher returns. So, if you’re considering investing in GICs, seize the opportunity of these rising rates.

Bank of Canada’s impact on GIC rates

The Bank of Canada plays a crucial role in determining GIC rates. Its decisions directly affect the returns offered to investors. As mentioned earlier, the recent rise in bond yields, fueled by expectations of economic recovery and inflation concerns, can influence GIC rates. However, it’s the Bank of Canada’s decisions regarding the overnight rate that have a more direct impact on GIC rates. The overnight rate is the interest rate at which major financial institutions borrow and lend funds among themselves overnight. When the Bank of Canada raises the overnight rate, it becomes costlier for financial institutions to borrow money, and this cost is often passed on to consumers in the form of higher GIC rates. Conversely, when the Bank of Canada lowers the overnight rate, it becomes cheaper for financial institutions to borrow money, potentially resulting in lower GIC rates for investors.

Housing and Mortgages impact on GIC rates

Furthermore, the housing market can also affect GIC rates due to the common practice of using GIC funds for mortgages. As mortgage demand increases, GIC issuers may be inclined to raise rates to attract investors. Therefore, understanding the relationship between the housing market and GIC rates is crucial for making informed investment decisions. Although the housing market is starting to stabilize at a more balanced level compared to before, housing demand remains strong despite the high costs, driven by low supply and demographic factors like immigration. These macro-trends are unlikely to reverse anytime soon.

Conclusion

To sum it up, with the rising bond yields and the potential for higher GIC rates, now is a fantastic time to ensure your Reserve Funds are invested in GICs. Condominium Reserve Funds should continue to focus on the short-end of the spectrum (1 to 2 years). While Lambda previously advised building up a small hedge of 5-year GICs (around 10-20% of Reserve Funds) to protect against a sharp downturn, further likely 6.00% GIC rate lessens the urgency to do so.

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