Bank of Canada to Chop Rates a Full Point by Year End, Marion Says

According to a leading economist, the Bank of Canada is expected to lower interest rates by a full percentage point by the end of this year.

Stéfane Marion, chief economist and strategist at the National Bank of Canada, suggested that with inflation, excluding shelter costs, already dipping below the central bank’s target range and youth unemployment reaching a decade high, policymakers might consider a reduction of 50 basis points at each of their next two meetings.

Marion noted that the central bank’s current aim is to adjust the key policy rate — presently set at 4.25% — to the neutral rate, which neither stimulates nor constrains economic growth.

“We all know that the neutral rate is closer to 3%. You have to get to 3% as quickly as possible,” he stated on Wednesday at the Bloomberg Canadian Finance Conference in New York. “How low we’re going to get below 3% remains to be seen, but the first step is for the Bank of Canada to bring us to 3% now. We needed to be there yesterday.”

The central bank's next rate decision is scheduled for October 23. Most of Canada’s major banks, including National Bank, anticipate a 50 basis point cut in the benchmark overnight rate. The final rate decision for this year will be made on December 11.

In September, the consumer price index fell to 1.6%, marking the first time in over three years that it dipped below the 2% target. When shelter costs are excluded, the inflation rate dropped to 0.4% last month, which is even below the central bank’s target range of 1%-3%.

One of the primary contributors to elevated shelter inflation is the country's record population increase, as the influx of new residents has intensified housing shortages. Since 2022, Canada has welcomed over three million new residents, roughly equal to the entire population of Puerto Rico.

This immigration surge has also driven significant labor force growth, outpacing monthly job gains over the past year. The unemployment rate for men aged 15 to 24 reached 15.3% last month, more than double the overall unemployment rate.

Despite these immediate challenges, Marion believes Canada is well-positioned for future growth. He pointed out that the country’s inexpensive and abundant electricity could meet the demands of the artificial intelligence sector, and its power grid is among the cleanest in the world.

Additionally, Canada benefits from a fiscal advantage, as its pensions are better funded than those in many other countries. This means the government is less likely to impose unexpected special taxes on corporations to cover any budget shortfalls, he explained.