Canadians are struggling to service historic levels of household debt and the Bank of Canada will have no choice but to drop rates next year to provide relief, according to a veteran economist.

“We have a debt crisis in this country, and it's not what people think,” David Rosenberg, economist and president of Rosenberg Research told BNN Bloomberg during a televised panel discussion on Tuesday.

“People think that it's the government debt crisis, (but) no, there is a crisis on Canadian household balance sheets.”

Rosenberg estimated the debt-to-income ratio in the household sector is over 170 per cent. He said that type of elevated debt-to-income ratio can be carried at lower rates, but he argued the Bank of Canada’s current overnight rate of five per cent is untenable for most Canadians.

Because of this, he said the central bank will need to bring rates down significantly to avoid a severe recession.

“They would have to cut at least 200 basis points … but I think this cycle, we’ll see at least 300 basis points of interest rate relief,” he said.

Ed Devlin, founder of Devlin Capital and senior fellow at the C.D. Howe Institute, told BNN Bloomberg in the panel talk that he also believes interest rates will come down quickly in the next year.

“Interest rates are going to come down a lot faster and a lot harder than the market thinks,” he said. “I would think 100 or 200 basis points next year is pretty realistic.”


Rosenberg argued that the Canadian economy is already in a recession, pointing to flat or negative real GDP numbers in three of the last four quarters.

He made the case that recent population growth has “camouflaged” the contraction of the Canadian economy and kept the Bank of Canada focused on inflation longer than necessary.

“We are already in a recession, and the Bank of Canada is busy fighting yesterday's battle, which is the inflation that's in the rear-view mirror,” Rosenberg said.

Devlin said the influx of immigration has distorted recent inflation prints, and kept things like housing prices higher than they should be.

“You've got these distortions around consumption, house prices, shelter costs, and the CPI, and the (Bank of Canada) has to anchor inflation expectations, which means they're over-tightening,” he said.


Rosenberg dismissed concerns that a rapid decrease in interest rates would put upward pressure on inflation, noting that most Canadians are too financially constrained to take on more debt, even at low rates.

“The view that they're going to cut rates and it's going to lead to this influx of demand for housing, that'll happen a couple of years from now, that is not on the horizon,” he said.

If Statistics Canada left shelter costs, which is mostly comprised of mortgage interest, out of their CPI readings, Rosenberg noted that Canadian inflation would be at 1.9 per cent, below the Bank of Canada’s two per cent target.

Devlin said that despite the central bank’s recent focus on inflation, it will soon be forced to shift focus to the overarching economic situation, predicting a “fast deceleration” in activity coming soon.

“Once they switch from (inflation) to the economy, that’s when rate cuts are really fast,” he said.