A couple of years ago, the expectation was that we could start to see higher interest rates this year as global economic growth picked up. When that didn’t happen, the conventional thinking on rate hikes shifted to mid-2015. Conservative investors who prefer to park their money in guaranteed investment certificates could hardly wait as visions of 5% GICs danced in their heads.
Well, that’s just not going to happen, at least not any time in the foreseeable future. In fact, it’s been well over a decade since five-year GICs even paid 4% annually. According to the Bank of Canada website, the highest average for a five-year certificate in the past 10 years was in July 2007 when the number came in at 3.73%. It hasn’t been close to that since.
In fact, we’re moving in the opposite direction. Back in April of this year, the average five-year rate got as high as 2.2%. Today it’s back down to 2%. The average rate over the past decade is 2.34%.
Reading between the lines, last week’s report from the Bank of Canada suggests that an upward move on interest rates in 2015 looks increasingly unlikely. The Bank projects that the Canadian economy won’t get back to full capacity until the second half of 2016 and even that forecast is problematic. In the press release announcing no change in the target overnight rate, the Bank said: “Persistent headwinds continue to buffet most economies and growth remains reliant on exceptional policy stimulus. Against a background of ongoing geopolitical uncertainties and lower confidence, energy prices have declined and there has been a significant correction in global financial markets, resulting in lower government bond yields.”
There are a couple of key points to note here. The first is the reference to “exceptional policy stimulus.” In effect, the Bank is saying that continued low interest rates combined with such programs as quantitative easing will be needed for some time to prevent the world from slipping back into recession. The U.S. Federal Reserve Board is ending its program this month just as the European Central Bank is embarking on its own.
The other phrase with broad implications is “resulting in lower government bond yields.” At the beginning of the year, almost everyone expected bond yields to rise this year, with prices falling in sync (the two move in opposite directions). That hasn’t happened. Bond yields continue to edge lower, with prices rising accordingly. As of Oct. 27, the FTSE TMX Universe All Government Bond Index was showing a year-to-date gain of 7.03%. Yields on long-term issues clearly show that bond traders do not anticipate any significant rate hikes for years to come. Canada bonds with 30-year maturities were yielding only 2.53% at the time of writing.
U.S. economic growth is somewhat more robust than here in Canada but even there the expectation of rate increases any time soon is muted. The latest consensus seems to be that the Fed will hold the line until at least the second half of next year. And even when it does move, there will be no pressure on the Bank of Canada to follow in lockstep. Higher U.S. rates would push our loonie lower against the greenback, giving an additional boost to exporters. Nothing could make Bank of Canada Governor Stephen Poloz happier.
So resign yourself to more of the same if you’re a GIC fan. The way things are going, you’ll be fortunate to keep pace with inflation.