Household debt crisis looming if rates stay high, says economist
Amid sustained global and domestic pressures, the Bank of Canada will have to cut interest rates by up to three percentage points to stave off the worst effects of a potential recession and a looming household debt crisis, according to economist David Rosenberg.
Rosenberg said that if the recent flat or negative real GDP readings are taken into account, Canada is for all intents and purposes already in a recession, “masked” only by the robust population growth seen this year.
During the third quarter, the national inflation rate fell by 1.1% compared to the same period last year, according to latest data from Statistics Canada.
Rosenberg said that given the prevailing environment, a rate cut will not necessarily lead to resurgent demand that could restart an upward trend in inflation readings.
The BoC is slated to make its final policy rate announcement for 2023 on December 6.
“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,” Rosenberg said.
Such a demand recovery could take several years to fully set in, he added.
#BreakingNews: Bank of Canada governor Tiff Macklem has said interest rates may be high enough to continue taming inflation in remarks that suggest the central bank could be at the end of its rate-hiking path.https://t.co/ItcymEjGWw#ratehikes #interestrates #inflation
— Canadian Mortgage Professional Magazine (@CMPmagazine) November 22, 2023
Household debt levels making elevated-rate environment unsustainable
The greater domestic-level pressure on the central bank will be record-high levels of household debt, with Rosenberg estimating that Canada’s household debt-to-income ratio has already exceeded 170%.
Rosenberg said that this trend represents a significant burden on Canadians, which in turn could likely convince the BoC that the current benchmark interest rate of 5% will be unsustainable in the long run.
“People think that it’s the government debt crisis, [but] no, there is a crisis on Canadian household balance sheets,” Rosenberg said.
Canadian household debt reached a historic high of $2.34 trillion in Q2 2023, including $1.73 trillion in mortgage debt and $604 billion in non-mortgage debt, according to a TransUnion study.
The analysis cited continuously rising costs of living, which has persisted despite slower inflation, as a major factor compelling Canadians to seek more liquidity through credit, TransUnion said.
