Why are Canadian banks quick to charge more for borrowing, but slow to increase savings account rates?

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While Canada's largest banks are charging more to lend money due to high interest rates, experts say they are failing to increase savings account rates in a similar way.

"On the borrowing side, the banks are much quicker to pass that on to consumers," Natasha Macmillan, the director of everyday banking at Ratehub.ca, told CTVNews.ca. "Unfortunately, however, on the saving side or on the deposit side, they're less quick to pass that on."

Aimed at taming inflation, the Bank of Canada began implementing a series of interest rate hikes in March 2022, from a historic low of 0.25 per cent to 4.5 per cent today – the highest it's been since 2007. With the cost of borrowing money increasing, it makes sense that banks have been quick to charge higher interest rates for mortgages and loans.

"When the Bank of Canada increases its policy rate, it's increasing the funding cost for banks," Claire Celerier, an associate professor of finance at the University of Toronto's Rotman School of Management, told CTVNews.ca. "It's quite normal for banks to transfer the increase in their funding cost to their loans and mortgage rates."

But in most cases, banks have not been as quick to increase interest rates for personal savings accounts.

Macmillan from Ratehub, a website that compares financial products like mortgages and credit cards, notes that while savings account interest rates have increased somewhat over the past year, they are being outpaced by borrowing costs.

"It does tend to move at a bit of a slower rate, whereas on the borrowing side, it's almost same day, next day kind of change, depending on the Bank of Canada announcements," Macmillan explained.

Flush with cash and posting profits, banks are not aggressively chasing after new deposits, according to Celerier.

"There is no bank advertising higher rates," Celerier said. "They have a lot of money in their balance sheets following the pandemic."

Macmillan and Celerier also both think a lack of competition and consumer apathy is keeping Canada's largest banks from offering more competitive savings account rates.

These banks advertise "high interest" savings accounts with rates between 0.05 per cent at TD Bank and 1.8 per cent at the Bank of Montreal. Others fall between 1.4 and 1.5 per cent – figures that can be more than double at smaller financial institutions, according to Ratehub.ca.

"There are definitely better saving rates in Canada outside of the big five," Macmillan said, referring to TD Bank, RBC, Scotiabank, BMO and CIBC. "It's definitely recommended to shop around… as opposed to being stuck with the banks that we're the most comfortable with or the most aware of."

The growing discrepancy between borrowing and saving rates has led to stern words and action from officials in countries including Australia, South Korea and New Zealand.

"What we are calling out across the banks is they had been very quick to increase their mortgage lending rates, but deposit rates have lagged behind and bank margins are holding up," the governor of the Reserve Bank of New Zealand said during a February press conference. "High deposit rates are a critical part to encourage savings, which takes inflation pressure out of the economy."

Canada's Department of Finance did not respond to a request for comment.

CANADA'S LARGEST BANKS WEIGH IN

CTVNews.ca reached out to Canada's six largest banks for explanations. TD Bank, CIBC, BMO and Scotiabank only replied with general statements highlighting products and services such as GICs, which have higher interest rates than most savings accounts.

"The (Bank of Canada) rate is one reference point that RBC uses to set our Prime Rate and interest rates on home equity loans, but it is not the sole driver of RBC’s funding costs," a Royal Bank of Canada spokesperson told CTVNews.ca. "When considering changes to our prime rate and interest rates on deposits and home equity loans, we weigh a number of factors, including the competitive environment, risk exposure, our responsibility to clients and shareholders and our funding and regulatory costs."

CTVNews.ca also received a response from the National Bank, which is Canada's sixth largest bank.

"Rates for borrowing are notably pegged to the Bank of Canada policy rate that has been raised several times in the past few months. For that reason, mortgage rates have fluctuated," a National Bank spokesperson explained. "On the other hand, rates on savings products are affected by a variety of factors, including product infrastructure and management costs as well as the 'stickiness' of the funds, in other words, the expected movements of the monies deposited."

Despite low savings account interest rates, experts think many Canadians will likely stick with their financial institution.

"It's more just kind of the apathy of, are you comfortable setting up a new bank account or going through the paperwork associated with it," Macmillan said. "I think we're at a time that it is definitely worth putting that time and investment forward to ensure that you can maximize your savings."

With files from The Canadian Press