The Bank of Canada just raised interest rates again. What does this mean for newcomers?

The Bank of Canada (BoC) recently announced another rise in interest rates, up to 4.5%, or up 25 basis points from 4.25% on December 7, 2022. While this is the smallest rise in interest over the past year, interest rates will stay high for the foreseeable future making larger spending more difficult than previous years. This has an impact on the day-to-day lives of all Canadians, including Canada’s newest immigrants.

Canada has one of the most stable economies globally but is still feeling the effects of international events. The BoC credits increased demand and global issues such as Russia’s war in Ukraine for the steep increase in price for oil, gas, and food.

The BoC says that raising the interest rate will have a positive influence in the long term. High interest rates have been proven to slow and decrease the rate of inflation (the rise in the cost of goods and services), which reached a high of 8.1% last June.

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Since then, inflation has dropped to 6.9% but still has a long way to go to reach the target of 2%. As interest rates rise and inflation remains high, newcomers often have concerns regarding how they will start their new lives in Canada.

High interest rates slow the economy and decrease demand

Economics is not an exact science, but some tactics have been proven to have long-term positive impacts on the economy (while still making things temporarily more expensive for consumers).

Raising the interest rate slows inflation by decreasing demand. When Canadians spend less money because costs are higher, overall demand decreases. This decrease allows suppliers to meet demand more easily, without having to raise prices. For example, there is more oil and gas to go around if people buy less of it and suppliers will be more likely to drop the price to clear the inventory and turn a profit.

The theory is that once oil prices drop, it becomes less complicated and expensive to transport items globally and businesses can reduce costs. Encouraging Canadians to spend less, even as the price of oil drops, has a double impact of businesses needing to have less supply, and spending less money, further reducing expenses for consumers in the long term.

If there is less demand, what does that do to the rate of employment?

One of the big draws for newcomers to Canada is the high rate of employment. Canada has a chronic shortage of labour in several sectors as the population ages and the birth rate remains one of the lowest globally.

In response, Canada released its most ambitious Immigration Levels Plan last November, with a target of admitting 500,000 new permanent residents per year by 2025. This is because Canada still has a high rate of job vacancies in several sectors such as healthcare, construction and professional and scientific services. The latest data from Statistics Canada shows that demand for employees in these sectors is outpacing the rate at which job vacancies are filled.

Last November Bank of Canada (BoC) Governor Tiff Macklem, spoke about the importance of continuing to hire immigrants.

“[One] way to rebalance supply and demand is to increase the supply of workers,” said Governor Macklem. “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.”

Raising interest rates, and slowing economic growth, gives businesses a chance to increase supply. In many instances, this can only be done through an increase in the labour force. If there are not sufficient workers to create enough supply to meet demand when interest rates and inflation drop again, the country could find itself right back where it started.

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Will this make it more difficult to buy a home in Canada?

Canada currently has a shortage of affordable, residential housing. A higher interest rate means it is more expensive to borrow money from the bank, mortgages become more expensive, and any kind of bank loan will cost more.

Again, this is designed to slow down the rate at which homes are purchased, giving the market time to rebuild supply, or in this instance, build more housing. In short, it will still be possible for new permanent residents and Canadians to buy homes, but it will be more expensive.

Canada also recently introduced a new measure that aims to increase the supply of housing. Under the new Act, only Canadian citizens and permanent residents will be permitted to buy homes until 2025. Temporary residents may still be able to buy a house in Canada, but there are several conditions attached that can make it much more difficult.

Impact on the cost of living

Immigrating to Canada is expensive. After paying all the application and travel fees, the cost of finding accommodation, local transportation and even groceries can be more expensive than newcomers are accustomed to and that can come as a shock.

Immigrants will likely start their time in Canada as renters. Canada is currently living with the highest rents since COVID-19, with the average rental cost in Canada at $2,048 a month, over 12% more than before the pandemic. As interest rates rise and mortgages are more expensive, landlords are continuing to increase rents to cover their own costs.

Additionally, between 2021-2022, the price of food rose 11% on average. The average four-person household in Canada can now expect to spend $16,288 on food in 2023.

Take away

The BoC says that Canada is now in a mild recession that will last through 2023. It is expected that GDP growth will slow and decrease from 3.6% in 2022 to just 1% through 2023.

Economists see the rate of inflation coming down to the targeted 2% by 2024 and a drop to 3% by the middle of this year. It is not clear when the interest rate will decrease but the BoC expects that it will not see any additional rises in the immediate future. That said, they are still prepared to increase rates if necessary to combat inflation which will further restrict spending ability.

In the short term, Canada can expect inflation to remain elevated, around 5%, and there will not be any significant decrease in the price of homes, rent and groceries. Still, BoC economists believe that core inflation has peaked and 2024 will see a slight growth in GDP. Combined with lower prices due to less inflation, newcomers and Canadians will be in a stronger economic position than they are this year.

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