‘Excessive’ Immigration Is Putting Pressure on Inflation: Scotiabank Economist

A Canadian flag hangs from a lamppost in front of the Parliament Buildings in Ottawa on June 30, 2020. The Canadian Press/Adrian Wyld

Canada’s rapid population growth due to immigration is putting upward pressure on inflation, and further interest rate hikes are a distinct possibility despite predictions saying otherwise, according to a Scotiabank economist.

Derek Holt, vice-president and head of capital markets economics at Scotiabank, said in a Dec. 19 note evaluating the latest inflation data that “Canada’s torrid rate of population growth is adding to inflationary pressures.”

Information on population growth released by Statistics Canada on Dec. 19 shows the country added 430,635 people in the third quarter, the fastest quarterly growth seen since 1957. At that time, the post-war baby boom and high immigration following the 1956 Hungarian Revolution accounted for the increased growth, says the agency.

Now, international migration accounts for 96 percent of population growth.

“Immigration is excessive full stop. Canada just added about 431k people in Q3 alone,” says Mr. Holt in his economics note. “That’s like presto, here’s a new city of London, Ontario created in one quarter. Or almost a new City of Hamilton.”

“The problem remains that there is little to no housing available for [newcomers] and it’s only going to get worse,” he wrote.

The Liberal government hasn’t named immigration as a factor in the housing crisis, while mostly focusing on measures to increase the housing supply in order to address shortages.

Prime Minister Justin Trudeau said on Dec. 15 that immigration is a source of “economic advantage,” when asked by reporters whether immigration should be reduced to help with the housing situation. He added that his government is “constantly looking at some of the challenges that are being faced.”

‘Major Policy Error’

Addressing the latest inflation reading of 3.1 percent in November, the same as in the previous month, Mr. Holt said he can’t “hop on the bandwagon” on predictions of a central bank rate cut in the spring.

The Bank of Canada has been holding its policy rate at 5 percent since its last hike of 25 basis points in July. With inflation falling since reaching a peak of 8.1 percent in June 2022 and with higher rates slowing down the economy, some expect the central bank could cut rates in the next few months.

“November’s core inflation readings leaned more toward continued hike risk than toward market pricing for a cut by March/April,” says Mr. Holt. “That would be a major policy error right into the thick of the Spring housing market and Winter government budget season.”

In his year-end speech at the Canadian Club in Toronto on Dec. 15, Bank of Canada Governor Tiff Macklem said it was still too early to consider cutting the policy rate as the bank is aiming to bring down inflation to 2 percent.

Asked by reporters whether there are risks to delaying rate cuts, Mr. Macklem said there are “risks on both sides.”

“We are in a difficult part of this monetary cycle, inflation is still too high,” he said. “If we don’t do enough, Canadians will have to continue to live with inflation that’s too high, too variable. And ultimately, we’re probably going to have to raise rates even further to get it down. So we don’t want to make that mistake.”