Bank of Canada holds interest rates steady: Why that’s good for newcomers

On April 12, the Bank of Canada (BoC) announced that it would hold interest rates steady at 4.5%.

Interest rates have stayed at 4.5% since January this year, following several increases over the latter half of 2022.

This rate is still high, but the absence of an increase in interest rates and the declining rate of inflation signals that Canada’s economy may be starting to stabilize. A steady interest rate means newcomers to Canada can set budgets for big purchases and get a consistent rate of return on any guaranteed investment certificates (GICs).

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Still, Bank of Canada Governor Tiff Macklem says current monetary policy needs to remain restrictive to lower the rate of inflation and that it is still possible that interest rates could climb higher. It is still too early to tell.

In a news conference announcing the update, Macklem said that the benefits of the higher interest rate will not be immediately obvious, as they typically come with a lag of between 18 and 24 months after measures are implemented, which is a factor in why prices are still so high for Canadians.

The interest rate has a heavy impact on the average Canadian’s ability to make large purchases, such as a home or a car.

Canada’s federal government recently amended an act that prohibited non-Canadians and permanent residents from buying a home in Canada, but the high interest rate means mortgage rates will remain elevated for some time and may be a cause for concern even for those with a locked-in mortgage rate that is up for renegotiation.

For now, a steady interest rate means that monthly mortgage payments will stay at the same rate and allow both newcomers and Canadians to budget and plan for the future.

Tight labour market and immigration

Macklem told reporters that the labour market has remained tight, with unemployment at 5%, but that businesses are starting to find it easier to find labour due to strong population growth.

He credits much of the growth to employers who use the Temporary Foreign Worker Program, which helps bring in additional skilled workers and reduces the number of job vacancies which in turn eases pressure on businesses struggling to meet demand.

Canada’s population is aging, and the economy relies on immigration to fill gaps in the labour force, keep essential services running, and to benefit from their income tax contributions.

Last November, Canada released the Immigration Levels Plan 2023-2025 containing the highest-ever targets for new permanent resident admissions at 500,000 per year by 2025. This will help ease the pressure to find skilled employees in high-demand sectors such as healthcare, construction, and professional and scientific services.

Speaking about the benefits of immigration for reducing inflation, Macklem told reporters in a news conference last January that increased immigration would rebalance supply and demand.

“The more we can do on supply, the less we will need to do on demand. The hiring of more immigrants is expected to help better regulate high wages, which the BoC says is a must because wages will have to slow to get inflation under control.”

Bank of Canada interest rate hikes

The current high interest rates can be traced back to measures taken during the COVID-19 pandemic. At the time, the BoC slashed interest rates to reduce some of the strain on Canadians facing financial hardship while many workplaces were closed.

As time passed and the economy experienced a strong rebound, increased spending led to more demand for products and services. Businesses had to work harder and raise prices to keep up which contributed to the high rate of inflation.

Raising interest rates curbs spending and eases demand. This means businesses can lower their prices and the cost of living should come down.

Inflation peaked in June 2022 at 8.1% and has since lowered to 5.2% as of February. The BoC predicts inflation will fall to around 3% in the middle of this year and decrease more gradually to the 2% target by the end of 2024.

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