Bank of Canada to cut rates by full percentage point by year-end, top economic strategist says

The Bank of Canada will likely cut its key interest rate by a full percentage point by the end of this year, a top Canadian economist said.

With non-housing inflation already below the central bank’s target range of 2 to 3 percent and youth unemployment rising to its highest in a decade, the Bank of Canada could cut rates by 50 basis points (0.50%) at each of its next two meetings remaining this year, said Stefan Marion, chief economist and strategist at the National Bank of Canada.

He noted that this would be because the central bank’s goal is now to bring its key interest rate (currently 4.25%) to what is known as a neutral rate, where it neither stimulates nor constrains economic growth.

“We all know that a neutral rate is closer to 3 percent. “You need to get to 3% as quickly as possible,” Marion said Wednesday at the Bloomberg Canada Financial Conference in New York. “How far below 3% we go remains to be seen, but the first step for the Bank of Canada is to get us to 3% now. We needed to be there yesterday.”

The Bank of Canada’s next meeting is Oct. 23. Most of Canada’s largest banks, including National Bank, expect the central bank to cut its key rate by half a percentage point. The bank’s last meeting of the year is Dec. 11.

In September, inflation eased to 1.6%, falling short of the lower end of its 2% target range for the first time in more than three years.

The country’s record population growth is a major contributor to elevated housing inflation, as the arrival of new residents has worsened housing shortages.

Immigration has also led to rapid labor force growth, which has significantly outpaced monthly job gains over the past year. The unemployment rate for young men aged 15 to 24 hit 15.3 per cent last month, more than double the overall unemployment rate.

Despite short-term challenges, Canada is well positioned for future growth, Marion said. The country’s abundant, cheap electricity could support demand from the artificial intelligence sector, and its grid is already one of the cleanest in the world.

It also has a fiscal advantage because our pensions are better funded than many countries, meaning the government is unlikely to impose special taxes on corporations to offset unexpected shortfalls, said the National Bank of Canada’s chief economic strategist.