On Wednesday, a top economist stated that the Bank of Canada is highly likely to cut interest rates by 100 basis points before the end of this year. Stéfane Marion, Chief Economist and Strategist at National Bank of Canada, pointed out that with inflation rates excluding housing costs having fallen below the central bank's target range, and the unemployment rate among young men reaching its highest level in a decade, policymakers may lower the policy interest rate by 50 basis points at each of the next two meetings.
Marion stated that the central bank's goal is to reduce the current key policy interest rate of 4.25% to the so-called neutral rate level, which is the interest rate that neither stimulates nor inhibits economic growth. "We all know that the neutral rate is close to 3%. We must get the interest rate down to 3% as quickly as possible," he said at the Bloomberg Canadian Finance Conference in New York. "The extent to which we will go below 3% remains to be seen, but first, we must get the interest rate down to 3%. In fact, we should have reached this level yesterday."
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The Bank of Canada's next interest rate decision meeting will be held on October 23rd. Most major banks, including the National Bank of Canada, expect policymakers to cut the benchmark overnight rate by 50 basis points. Additionally, the central bank's last interest rate decision for this year will be on December 11th.
In September, Canada's Consumer Price Index (CPI) fell to 1.6%, marking the first time in over three years that it was below the 2% target level. However, excluding housing costs, the index was only 0.4% last month, below the central bank's target range of 1%-3%.
Marion noted that one of the main reasons for the rise in housing inflation is the record increase in population. Since 2022, Canada's population has increased by over 3 million, nearly equivalent to the total population of Puerto Rico. The influx of new residents has exacerbated the housing shortage and driven up housing prices.
At the same time, immigration has also led to rapid growth in the labor force, with the labor force growing faster than monthly employment growth over the past year. Last month, the unemployment rate for men aged 15 to 24 reached 15.3%, more than double the overall unemployment rate.
Despite short-term challenges, Marion expressed optimism about Canada's future prospects. He pointed out that Canada has cheap and abundant electricity resources capable of meeting the needs of the artificial intelligence industry, and its power grid is already one of the cleanest in the world.
Furthermore, Canada also has a fiscal advantage, with pension funds more sufficient than many countries, which means that the government is less likely to impose special taxes on businesses to fill fiscal gaps.