Back in the 1980s, GIC interest rates were around 24%, allowing my mother to save up a lot of money for my future on her nurse’s salary. Nowadays, though, the interest rates are between 1% and 2%.
I think it has something to do with mortgages, but what gives?
In: Economics
The company selling the GIC calculates the rate. They’re going to take the money you pay for the GIC and invest it in very safe securities available in the capital markets. They’ll earn a return on those investments and pass most of it back to the GIC buyer.
In today’s low interest rate environment those safe investments aren’t paying much, so the GIC issuer can’t pass much investment income back to the GIC buyer.
This is one of the side effects of the Fed keeping interests rates low that doesn’t get talked about a lot. Keeping interest rates low has stimulated the economy, but has made it much more difficult for people to safely save money.
The stock market is performing well but is a very risky investment. Safe investments like GICs and bonds are hardly paying anything these days.
Source: Investments Actuary
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