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Rosenberg sees Bank of Canada slashing interest rate to avert household debt crisis

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Historic levels of household debt are straining the finances of Canadians to the point that it will be impossible for the Bank of Canada to keep interest rates at current levels for long, according to prominent economist David Rosenberg.

“People think that it’s the government debt crisis, (but) no, there is a crisis on Canadian household balance sheets,” Rosenberg said Nov. 28 on BNN Bloomberg.

The president of Rosenberg Research said household financial strain had hit a critical level, estimating the household debt-to-income ratio to be over 170 per cent. Such high ratios, according to Rosenberg, are unsustainable given the Bank of Canada’s current overnight rate of five per cent.

In May, when the central bank’s rate was 4.5 per cent, the Canada Mortgage and Housing Corp. said Canada’s elevated household debt levels, the highest in the G7, posed a considerable risk to the economy, making it particularly susceptible to a global economic downturn.

Since then, there have been two additional interest rate hikes and Rosenberg contends the current rate is unsustainable for the majority of Canadians. He said the central bank would need to lower rates significantly to avert a severe recession, and sees the Bank of Canada cutting rates by at least 200 to 300 basis points to provide economic relief. The Bank of Canada’s next interest rate announcement is scheduled for Dec. 6.

Rosenberg said he believes Canada is already in a recession, evidenced by flat or negative real gross domestic product (GDP) readings in recent quarters. He believes that population growth has masked the recession and led the Bank of Canada to focus excessively on inflation.

Rosenberg dismissed fears that lowering interest rates would lead to a spike in demand and reignite inflation.

“The view that they’re going to cut rates and it’s going to lead to this influx of demand for housing … that is not on the horizon,” he said, noting it would be several years before such a rebound would materialize.

He also pointed out that excluding shelter costs from Canada’s consumer price index (CPI) would show inflation at 1.9 per cent, below the Bank of Canada’s target.

• Email: shcampbell@postmedia.com


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