Bank of Canada says immigration curbs long-term inflation, but has strained housing market
“Then, when newcomer arrivals picked up sharply in early 2022, that steady decline in the vacancy rate became a cliff,” he said in prepared remarks on Dec. 7 in Windsor, Ont. “Canada’s vacancy rate has now reached a historical low.”
Gravelle delivered the speech focused on housing and immigration a day after the Bank of Canada left the benchmark overnight rate unchanged at five per cent. His remarks shed little new light on policymakers’ decision to pause, which was widely expected by markets and economists in a Bloomberg survey.
He did, however, downplay improvement in a three-month moving average of core measures that the central bank has described as key to its thinking. While that average dropped in October to about three per cent, at the top of the bank’s control range, the measure is “volatile,” he said.
“We must remember it’s just one month. We need to see further progress,” he said.
The bank is closely watching inflation expectations, wage growth and corporate pricing behaviour, he reiterated. “These indicators are helping us assess whether inflation is on a sustained path to two per cent. Given the risks to the inflation outlook, we remain prepared to raise the policy rate further if needed.”
The impacts of immigration in Canada — which welcomed a million newcomers for the first time last year — have been hotly debated. Prime Minister Justin Trudeau’s government argues high levels of migrants are needed to offset an aging population, but a public backlash has brewed as housing prices soar, especially amid inadequate home supply.
Gravelle said that since the start of 2022, strong immigration has boosted the level of potential output by two per cent to three per cent without adding materially to inflation. The bank estimates that the increase to consumer spending from the recent increase in newcomers added less than 0.1 percentage points to inflation.
Still, housing construction has been unable to keep up with the rapid rise in demand, and that imbalance has “serious” consequences for inflation, he said.
Shelter price inflation rose to 6.1 per cent annualized in October and contributed 1.8 percentage points to that month’s total inflation reading of 3.1 per cent. While mortgage interest costs are a factor, other components of the shelter inflation basket have not come down as much as they typically would, Gravelle said.
Rent inflation, meantime, accelerated to 8.2 per cent in October, the highest in 40 years.
The situation in Canada stands in contrast with that of 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 said.
“Canada needs more homes,” Gravelle said. “And we need to make our housing supply more responsive to increases in demand.”
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