Borrowers could get run over by Savers in the driver’s seat 

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OTTAWA (CU)_The Bank of Canada last week, hiked its benchmark rate by half a point, but could consider event larger increases to rein in inflation which is at a 31-year high. When inquired if the central bank would consider increasing rates by more than 50 basis points in one go Governor Tiff Macklem said: “I’m not going to rule anything out.” Many experts say the half-point hike last week was just the beginning and are warning that every household and neighbourhood in the country would be affected by the fallout, although in very different ways.

Scotiabank’ Head of Capital Economics Derek Holt said this week that there is a compelling case for a rate increase of up to a full-point in June in tame consumer price pressures, and many other economists are largely in agreement. This is owing to the fact that inflation surged 6.7 per cent year-over-year last month, at a time when the Bank of Canada’s target is inflation at two per cent.

Higher benchmark rates are good news for long suffering savers but no so much for borrowers. The power of compounding widens the gap between these two groups, with those who save being rewarded with higher returns on savings accounts, guaranteed investment certificates (GICs), investment-grade corporate bonds as well as government bonds. Longer term GICs have already hit four per cent, while five-year Government of Canada bond yields were around 2.83 per cent as of Friday.

Meanwhile, it is a grim outlook for borrowers, as their financial burden could grow just as quickly. In February this year, the seasonally adjusted balance of home equity lines of credit registered the fastest monthly increase in a decade of one per cent. Figures published by Statistics Canada also show that an average Canadian household currently owes a record-high of $1.86 for every dollar it brings in.

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