GIC Rates Increase 2024: What You Need to Know and How to Take Advantage

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Key Takeaways

GIC rates have risen significantly in the past year, reaching over 6% for some short-term GICs.
The main reason for the increase is the high inflation and interest rate environment in Canada, which the Bank of Canada has been trying to contain by raising its benchmark rate.
Most forecasts predict that interest rates will decline in 2024, which could lead to lower GIC rates as well.
Investors who are considering GICs should weigh the benefits of locking in high rates now versus the potential for higher returns from bonds or other investments if rates fall in the future.

Introduction

Guaranteed investment certificates (GICs) are a popular choice for Canadians who want a safe and predictable return on their money. GICs are essentially loans that you make to a bank or other financial institution, which pays you a fixed rate of interest for a specified period of time. At the end of the term, you get your principal back, plus the accumulated interest.

GICs are attractive because they offer a guaranteed return, regardless of market fluctuations or economic conditions. They are also insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 per depositor, per institution, in case the issuer fails.

However, GICs are not without drawbacks. One of the main disadvantages of GICs is that they are illiquid, meaning that you cannot access your money before the maturity date without paying a penalty. Another drawback is that they are subject to inflation risk, meaning that the purchasing power of your money may decline over time if the inflation rate exceeds the interest rate.

In this article, we will explore the current state of GIC rates in Canada, the factors that influence them, and the outlook for 2024. We will also provide some tips and strategies for investors who are interested in GICs.

Current GIC Rates in Canada

GIC rates have increased significantly in the past year, reaching levels that have not been seen in almost three decades. According to MoneySense, the average one-year Canadian GIC rate has shot up from 2% to 4.90% in the past 12 months. Some credit unions and trust companies are offering rates over 6% for short-term GICs, though 4- and 5-year rates are just under 6%.

Term	Interest Rate
1-year	5%
2-year	4.3%
3-year	4.1%
4-year	4.45%
5-year	4.35%

^{The table shows some of the interest rates you can get on long-term non-redeemable GICs at Scotiabank as of mid-December 2023}

Rates are provided for information purposes only and are subject to change at any time.

These rates are much higher than the rates offered by high-interest savings accounts (HISAs), which are another option for savers who want easy access to their money. According to Ratehub.ca, the average HISA rate in Canada is 1.23% as of December 2023.

Factors Influencing GIC Rates

The main factor that influences GIC rates is the interest rate environment in Canada, which is largely determined by the Bank of Canada (BoC). The BoC sets the overnight rate, which is the interest rate at which banks lend and borrow money among themselves. The overnight rate influences the prime rate, which is the interest rate that banks charge their most creditworthy customers. The prime rate, in turn, affects the rates that banks offer on various products, such as mortgages, loans, and GICs.

The BoC adjusts the overnight rate to achieve its inflation target of 2%. When inflation is high, the BoC raises the overnight rate to cool down the economy and reduce the demand for goods and services. When inflation is low, the BoC lowers the overnight rate to stimulate the economy and increase the demand for goods and services.

In the past year, Canada has experienced a surge in inflation, mainly due to the supply chain disruptions, labour shortages, and pent-up demand caused by the COVID-19 pandemic. According to Statistics Canada, the annual inflation rate was 4.7% in November 2023, the highest since 2003. To contain the inflationary pressures, the BoC has raised the overnight rate five times since January 2022, from 0.25% to 5%.

The higher overnight rate has led to higher prime rates, which have led to higher GIC rates. Banks are willing to pay more interest to attract deposits, which they can then lend out at higher rates to borrowers. Savers are also more likely to lock in their money in GICs, which offer a higher return than savings accounts or bonds.

Outlook for 2024

The question that many investors are asking is: will GIC rates keep going up in 2024? The answer is not clear, as it depends on how the inflation and interest rate situation evolves in the next year.

Most forecasts predict that interest rates will decline in Canada in 2024, as the inflationary pressures subside and the economy cools down. For example, RBC Economics expects the BoC to cut the overnight rate by 1% by the fourth quarter of 2024, while Scotiabank and TD project a 0.75% reduction by the end of 2024. These forecasts are based on the assumption that the pandemic will be under control, the supply chain issues will be resolved, and the labour market will adjust to the new normal.

If these forecasts are accurate, then GIC rates could also decline in 2024, as the demand for deposits decreases and the competition among banks eases. However, interest rates are very difficult to predict, and there are many uncertainties and risks that could affect the outlook. For instance, if the pandemic worsens, the supply chain problems persist, or the labour market tightens further, then inflation could remain high or even increase, forcing the BoC to keep the overnight rate high or even raise it further.

Therefore, investors who are considering GICs should weigh the benefits and drawbacks of locking in high rates now versus waiting for lower rates in the future. There are pros and cons to both strategies, depending on your risk tolerance, time horizon, and financial goals.

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Tips and Strategies for GIC Investors

Here are some tips and strategies for investors who are interested in GICs:

Compare rates from different providers. GIC rates can vary significantly among different banks, credit unions, and trust companies. You can use online tools, such as Ratehub.ca or MoneySense, to compare the best GIC rates available in Canada. You may find that some smaller or online-only institutions offer higher rates than the big banks, but make sure they are CDIC-insured and reputable before investing with them.
Consider the term and liquidity of your GIC. GICs come in different terms, ranging from 30 days to 10 years. Generally, the longer the term, the higher the interest rate. However, longer-term GICs also have lower liquidity, meaning that you cannot access your money before the maturity date without paying a penalty. Therefore, you should choose a term that matches your cash flow needs and investment horizon. You can also use a strategy called laddering, which involves splitting your money into several GICs with different terms, such as one, two, three, four, and five years. This way, you can benefit from higher rates while maintaining some liquidity and flexibility.
Consider the type and features of your GIC. GICs come in different types and features, such as redeemable, non-redeemable, cashable, market-linked, and foreign currency. Each type has its own advantages and disadvantages, depending on your risk appetite, return expectations, and tax implications. For example, redeemable or cashable GICs allow you to withdraw your money before the maturity date without a penalty, but they usually offer lower interest rates than non-redeemable GICs. Market-linked or index-linked GICs offer the potential for higher returns based on the performance of a stock market index, but they usually have a lower guaranteed minimum rate and are subject to market risk. Foreign currency GICs offer exposure to different currencies, such as US dollars or euros, but they are subject to exchange rate risk and may not be CDIC-insured. Therefore, you should understand the features and risks of each type of GIC before investing in them.
Consider the tax implications of your GIC. GICs are considered fixed-income investments, which means that the interest income they generate is fully taxable at your marginal tax rate. This can reduce your after-tax return, especially if you are in a high tax bracket. Therefore, you may want to hold your GICs in a registered account, such as a TFSA, RRSP, or RESP, where the interest income is either tax-free or tax-deferred. However, you should also consider the contribution limits, withdrawal rules, and other factors that apply to each type of registered account before investing in them.

Conclusion

GICs are a safe and predictable investment option for Canadians who want a guaranteed return on their money. GIC rates have increased significantly in the past year, reaching over 6% for some short-term

Source: (1) Will GIC rates keep going up in 2024? – MoneySense. https://www.moneysense.ca/save/investing/gic/will-gic-rates-keep-going-up-in-2024/. (2) Will GIC rates keep going up in 2024? – MoneySense. https://www.moneysense.ca/save/investing/gic/will-gic-rates-keep-going-up-in-2024/. (3) What to expect for GICs in 2024 – MoneySense. https://www.moneysense.ca/columns/ask-a-planner/what-to-expect-for-gics-in-2024/. (4) The investment product of the year is the humble GIC, but what about 2024?. https://canadanewsmedia.ca/the-investment-product-of-the-year-is-the-humble-gic-but-what-about-2024-the-globe-and-mail/.