Retirees: Why Are GIC Rates so Low?

Canadian retirees or those nearing retirement will remember a time when GICs were coveted investment products. Heck, I’m a millennial and even I remember hearing about how great GICs were when I was a kid. What a difference a few decades can make.

GIC products have offered rock-bottom savings rates over the past decade. The 2007-2008 financial crisis shook the global economy. In response, central banks moved to drop interest rates to historic lows. This was great for lenders and borrowers, as well as industries that benefit from this environment like real estate. However, it has been bad news for traditional savers.

Most high-interest savings accounts and short-term GICs aren’t even able to keep up with inflation. This leaves savers who rely on these products in a very bad long-term position. The benchmark rate for the Bank of Canada stands at 0.25% right now. Factoring in inflation at around 2%, real interest rates have fallen into negative territory.

So, why are savings products stuck at low interest rates? Simple, banks seek profit. A shocker, I know. Banks have been forced to lower mortgage rates to stay competitive with their peers. Therefore, it is required to lower the interest rates it pays on deposit products.

Retirees on the hunt for income-producing investments should look to bonds or reliable dividend stocks in this climate. For example, Fortis (TSX:FTS)(NYSE:FTS) is a utility holding company that has achieved 47 consecutive years of dividend growth. Stocks that boast a long streak of dividend-growth are typically very reliable. Fortis is in a league of its own on the TSX.