Immigration and the effect on Canada’s economy and inflation

Deputy Governor Toni Gravelle outlines how immigration affects Canada’s economy and inflation in a recent speech

  • Bank of Canada’s policy decision: The Bank of Canada held the policy interest rate at 5% on December 7, 2023, reflecting its view that monetary policy actions are working to cool the economy and relieve price pressures. The Bank has made progress on restoring price stability, but it is not there yet. It remains prepared to increase the policy rate further if needed.

  • Immigration and economic growth: Immigration is one of Canada’s greatest strengths, as it boosts the labour force and the potential growth rate. Canada has had the fastest growing population in the G7 since 2016, driven mostly by newcomers. Newcomers have helped ease the tight labour market and alleviate critical labour shortages in many sectors. However, some newcomers face challenges in getting their credentials recognized and finding suitable employment.

  • Immigration and inflation: The recent increase in immigration boosted consumption in the near term, but it had barely any effect on inflation. However, due to Canada’s existing housing supply challenges, population growth has added to the pressure on shelter price inflation, which accounts for about 25% of the CPI basket. The Bank of Canada calls for more policy actions to increase housing construction and make the housing market more responsive to demand.

  • Impact on inflation: The low vacancy rate has contributed to higher shelter price inflation, which accounts for about 25% of the CPI basket. Rent inflation has accelerated to 8.2% in October, a 40-year high, while housing prices have not fallen as much as expected.

  • Job vacancies and immigration: Canada’s high job vacancy rate, which is more than 80% higher than pre-pandemic levels, is due in large part to the country’s aging population. More than one in five working-age Canadians are approaching retirement age, and the birth rate is not high enough to replace those who are retiring. A recent study from Statistics Canada shows that new immigrants accounted for 8% of the total employed labour force in 2021, but made up 13% of workers in the food services and hospitality industry, as well as 11% in the professional services sector and 10% in the manufacturing and transportation sectors 1.

  • Vacancy rate and rental housing: The demand for rental housing in Canada has surged due to higher immigration and net migration. The national vacancy rate for purpose-built rental apartments dropped from 3.1% in 2021 to 1.9% in 2022, the lowest rate since 2001 2