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

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With inflation excluding shelter costs already slipping below the central bank’s target range and joblessness among young men rising to a decade high, policymakers may opt to reduce policy by 50 basis points at each of their next two meetings, according to Stéfane Marion, chief economist and strategist at National Bank of Canada.

He said that’s because the central bank’s goal is now to bring the key policy rate — currently at 4.25 per cent — to the so-called neutral rate, where it neither stimulates nor restricts economic growth.

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

The central bank’s next decision is Oct. 23. The National Bank of Canada including National Bank expect policymakers to cut the benchmark overnight rate by half a percentage point. The bank’s following and final rate decision this year is on Dec. 11.

In September, the consumer price index eased to 1.6 per cent, undershooting the two per cent target for the first time in more than three years. But taking out shelter costs, the rate fell to 0.4 per cent last month, which is even lower than the central bank’s target range of one per cent to three per cent.

The country’s record population surge is one of the key reasons behind elevated shelter inflation as arrivals of new residents exacerbated housing shortages. Since 2022, the country has added more than three million people, which is roughly the equivalent of the entire population of Puerto Rico.

Immigration also led to rapid labour force growth, which has been eclipsing monthly job gains over the past year. The unemployment rate among men between 15 to 24 years old reached 15.3 per cent last month, more than double the overall joblessness rate.

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

It also has a fiscal advantage because its pensions are better funded than many countries, which means the government likely won’t surprise corporations with special taxes to make up for any unexpected shortfalls, he said.

Bloomberg.com