High Immigration Linked To Worsening Inflation, Bank Of Canada Deputy Governor Says

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by Tyler Durden
Monday, Dec 18, 2023 - 04:00 PM

Well here's an inconvenient talking point for Justin Trudeau and his staff: Bank of Canada Deputy Governor Toni Gravelle gave a speech last week which focused on the ties between rising immigration and rising inflation. 

The surge in immigration in Canada has led to an unprecedented demand for housing, outpacing construction and driving up shelter costs, Gravelle said during his speech. 

Taking a cautious stance on monetary policy, Gravelle also expressed the need for further reduction in inflation before committing to any future decisions on interest rate adjustments, according to TrueNorth.

Last week, despite maintaining a steady policy rate of 5%, the Bank of Canada hinted at the possibility of future rate increases, depending on economic conditions.

With inflation showing signs of decline and consumer spending decelerating, Gravelle noted the economy is achieving a state of equilibrium. Despite these positive trends, the central bank remains vigilant, not ruling out the possibility of additional rate hikes if necessary.

Gravelle said: “While we saw some welcome improvement in inflation measures in October, we must remember it’s just one month. We need to see further progress.”

Canada’s housing supply has not kept pace with recent increases in immigration. This is different from the United States where housing construction has been more flexible to respond to population shifts and where rent inflation is expected to continue to decline,” he continued. 

“This jump in demographic demand coupled with existing structural supply issues could explain why rent inflation continues to climb in Canada. It also helps explain, in part, why housing prices have not fallen as much as we expected,” Gravelle said.

“When newcomer arrivals picked up sharply in early 2022, that steady decline in the vacancy rate became a cliff. Canada’s vacancy rate has now reached a historical low,” he added.

“Newcomers have helped loosen tight labour markets and have significantly improved our country’s potential growth, which will help keep a lid on inflation pressures in the long run.”

The report said that inflation in Canada dipped to 3.1% in October from a June 2022 high of 8.1%, yet housing costs continue to soar, influenced by the bank's rates leading to increased mortgage expenses and sustained high immigration.

Economists speculate that the Bank of Canada may start lowering interest rates by mid-2024, though official confirmation is pending. Gravelle's recent remarks did not suggest any imminent shift towards a more lenient monetary policy.