Immigration may help Canada lower interest rates

On October 26, the Bank of Canada (BoC) increased the policy interest rate by 50 basis points, up to 3.75%.

2022 has been a year full of continual interest rate hikes, as the BoC has been increasing its policy interest rate throughout the year in an effort to aggressively combat inflation in Canada. Initially, when first reported on January 26, the BoC's policy interest rate started the year at 0.25%. Since then, the rate has increased by at least 25 basis points with every hike.

A policy interest rate is a reference point, set by the Bank of Canada, that informs the interest rates charged to consumers on mortgages and lines of credit by banks across the country.

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What this means for consumers will depend on if they are borrowing money from the bank (‘borrowers’) or if they are able to save their money (‘savers’) but the following will outline the impacts that Canada’s current interest rate circumstances are having on both these groups.

Savers: With the increase in interest rates, banks may now (although they are not obligated to) raise savings account interest rates proportionally to match borrowing interest rates, especially if competitive pressures are put on these institutions.

Borrowers: As an example, homeowners are potentially due to see a rise in debt or they may struggle to acquire a new loan due to rising interest rates. For instance, a homeowner set to renew their fixed-rate mortgage could face more expensive monthly payments. Similarly, variable-rate mortgage owners may see increased payments over time that mirror these new policy rates.

Why are interest rates rising?

Now that we’ve covered what is happening with interest rates in Canada, let’s talk about why.

Simply, interest rates are going up to eventually bring inflation down. Essentially, this is an effort to stabilize the economy because higher interest rates will discourage consumers from borrowing money since it will now cost them more money to do so. The purchasing of goods will decrease accordingly, as will demand in general. Subsequently, consumers will become more likely to save money as interest rates on savings products also rise. These measures will slow down and stabilize the economy, for the betterment of all Canadians in the long run.

For now, however, interest rates may continue to rise in the short-term for a little while longer – but potentially not for as long as once expected (but more on that later).

Are rising interest rates having a negative impact on Canadian immigration?

Considering the impact that rising interest rates can have on the Canadian population economically, it may seem reasonable to expect this kind of economic uncertainty to discourage immigrants from coming to Canada, or at least give them a reason to think a little harder about their other options. Fortunately for Canada’s economic and social prosperity, this is not the case.

After a period of slower immigration due to border closures and pandemic restrictions, Canada’s immigration numbers are starting to work their way back to normal. In fact, 2021 saw Canada welcome its highest-ever number of immigrants in a single year. The over 405,000 landed permanent residents cumulatively surpassed the previous record set in 1913.

In other words, Canadian immigration is not adversely impacted by rising interest rates, and things are looking bright for the country’s immigration future. This positive outlook is reaffirmed by Canada’s immigration targets over the next few years, which Immigration, Refugees and Citizenship Canada (IRCC) has laid out in the Immigration Levels Plan for 2022-2024.

As part of that plan, Canada is now looking to welcome over 430,000 immigrants annually between now and 2024.

2022 end-of-year immigration target: 431,645

2023 immigration target: 447,055

2024 immigration target: 451,000

Canada’s next Immigration Levels Plan, for 2023-2025, will be announced by November 1, 2022.

Note: The new Levels Plan may result in revisions being made to the immigration targets for 2023 and 2024, but the targets set by IRCC should remain high, as Canada looks to increase immigration to make up for low numbers during the pandemic and further brighten Canada’s economic and social future by welcoming newcomers to this country.

If rising interest rates aren’t hurting Canadian immigration, what do the two things have to do with one another?

Contrary to the negative connection that some may assume between interest rates and foreigners coming to Canada, economists such as Stephen Brown of Capital Economics allude to the idea that seeing more immigrants come to this country could greatly help Canada lower interest rates sooner than other countries around the world.

Research from Statistics Canada suggests that immigrants play a big part in addressing Canadian labour shortages. If fact, research published in June of 2022 indicates that 84% of growth in the Canadian labour force during the 2010s was accounted for by immigrants. Accordingly, a higher degree of immigration to Canada in the future could help continue to ease pressure on labour shortages across the country — one step, albeit a significant one, on Canada’s journey to eventually reducing interest rates.

Welcoming more immigrants is expected to help combat Canada’s high job vacancy rates and ease the burden of rising wages on the Canadian economy. Since newcomers to Canada would help weaken labour demand by reducing country-wide job vacancies, experts say that Canada can expect immigration to play a significant role in the eventual steadying of the economy because of reduced interest rates.

Additionally, Brown forecasts that more immigration will mean that “rental price inflation [will] likely … slow in 2023”. In other words, an increased number of property rentals — the expectation that comes with more immigrants coming to Canada — could help regulate overall pricing over time, adding more stability to the country’s housing market to the benefit of the economy.

Ultimately, what this all means is that Canada’s expected influx of immigration over the coming years could be advantageous for everyone that calls this country home — not only the immigrants coming to Canada in search of a better life but also the entire country from an economic viewpoint.

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