On April 12, the Bank of Canada (BoC) made the decision to maintain interest rates at 4.5%. These rates have remained consistent since January, following a series of rate hikes in the latter half of 2022. Although still considered high, the lack of additional increases and a diminishing inflation rate suggest that the Canadian economy may be heading towards stabilization. A stable interest rate enables newcomers to plan for significant purchases and ensures a constant return on guaranteed investment certificates (GICs).
However, Tiff Macklem, the Governor of the Bank of Canada, emphasizes the need for the current restrictive monetary policy to continue in order to reduce inflation. It is too soon to determine whether interest rates will eventually rise. During a press conference, Macklem mentioned that the advantages of increased interest rates are typically noticeable 18 to 24 months after implementation, which is one reason why prices remain high for Canadians.
Interest rates greatly affect the ability of Canadians, including newcomers, to make substantial purchases such as homes or cars. The Canadian federal government recently altered legislation that previously restricted non-Canadians and permanent residents from purchasing homes in the country. However, elevated interest rates will likely cause mortgage rates to remain high for an extended period, posing concerns even for those renegotiating a fixed mortgage rate.
For the time being, a stable interest rate ensures that monthly mortgage payments remain consistent, enabling both newcomers and Canadians to budget and plan for the future.
Regarding the labour market and immigration, Macklem mentioned that the unemployment rate is at 5% and businesses are finding it easier to access labour due to robust population growth. Much of this growth can be attributed to employers utilizing the Temporary Foreign Worker Program, which attracts additional skilled workers and decreases job vacancies, thereby alleviating pressure on businesses struggling to meet demand.
Canada's aging population necessitates immigration to fill labour force gaps, maintain essential services, and benefit from income tax contributions. In November, the Immigration Levels Plan 2023-2025 was released, setting the highest-ever targets for new permanent resident admissions at 500,000 annually by 2025. This will help alleviate pressure to find skilled workers in high-demand sectors such as healthcare, construction, and professional and scientific services.
Macklem highlighted the positive impact of immigration on inflation reduction in a news conference last January, stating that increased immigration would help balance supply and demand. The Bank of Canada anticipates that hiring more immigrants will contribute to better wage regulation, which is essential for bringing inflation under control.
The present high interest rates are a result of actions taken during the COVID-19 pandemic when the BoC lowered interest rates to alleviate financial hardships faced by Canadians during widespread workplace closures. The subsequent economic rebound and increased spending led to greater demand for products and services, causing businesses to raise prices and contribute to high inflation.
Higher interest rates help curb spending and reduce demand, allowing businesses to lower prices and decrease the cost of living. Inflation, which reached a peak of 8.1% in June 2022, has since decreased to 5.2% as of February. The BoC projects that inflation will drop to around 3% by mid-year and continue to decline gradually to the 2% target by the end of 2024.