Canadians’ savings drip away as deposit interest stays behind inflation

Most Canadian savings accounts still largely languishing at around one per cent, which haven't kept up with the inflation rate of 8 per cent.

The savings accounts of Canadians have sprung a leak.

As inflation tops eight per cent, anyone with money in the bank is seeing their savings drip away at the fastest rate on record because interest rates for savings accounts, still largely languishing at around one per cent, haven’t kept up.

“They will lose money. The value of their savings is decreasing,” said Claire Celerier, an associate professor of finance at the University of Toronto’s Rotman School of Management.

It’s a sharp contrast to the last time inflation ran this hot. In 1981, inflation peaked at over 12 per cent, but Statistics Canada data says bank accounts were paying out 19 per cent interest, and even in 1990 when inflation was running a little under five per cent, accounts were paying out over nine per cent.

There are several reasons for the lag, but part of the problem is the concentration of Canada’s banking sector, said Celerier.

“When there is lower competition between banks, then it takes more time for them to adjust rates on deposit accounts.”

Banks simply don’t have much incentive to change rates unless they have to, she said.

“When banks don’t increase rates on deposits they’re making more profits … It’s a very easy way to make profits, to have a low rate on deposit accounts.”