Bank of Canada Cuts by 25 basis points, to 4.75% as Economy and Inflation Slowed. QT Continues

The large influx of immigrants to Canada has had significant impacts on the labor market and the housing sector, particularly the rental housing market.

In terms of the labor market, immigrants have been a driving force behind Canada's labor supply. With job vacancies in late 2021 being 80% higher than before the COVID-19 pandemic and the working-age population aging, high levels of immigration have become even more critical to the labor market4. Immigrant workers have accounted for a significant portion of the growth in the total labor force and have filled labor shortages in many sectors, including transportation, warehousing, professional services, and accommodation and food services6.

However, despite their contributions, substantial challenges related to skill utilization persist for immigrants. Many university-educated immigrants have been working in jobs that do not require a university degree. This underutilization of skills has been a long-standing issue in the Canadian labor market.

In the housing sector, the large influx of immigrants has had a significant impact on the demand for rental housing. As the number of immigrants has increased, so has the demand for rental accommodations. This increased demand has led to higher rents in many cities, as the supply of rental housing has not kept pace with the demand. In addition, the rapid increase in immigration has led to a shortage of affordable housing options, particularly in urban areas where immigrants tend to settle.

Overall, the large influx of immigrants to Canada has had both positive and negative impacts on the labor market and the housing sector. While immigrants have filled labor shortages and contributed to the economy, challenges related to skill utilization persist, and the increased demand for rental housing has led to higher rents and a shortage of affordable housing options.

The Bank of Canada has taken several measures to address inflation and the economic slowdown in the country. These measures include:

1. Implementing quantitative tightening: The Bank announced in April that it was ending the reinvestment phase of its Government of Canada Bond Purchase Program and beginning quantitative tightening. This meant that maturing Government of Canada bonds on the Bank's balance sheet would no longer be replaced and that, as a result, the size of the balance sheet would decline over time.

2. Raising the policy interest rate: In March 2022, the Bank's Governing Council raised the policy interest rate by 25 basis points—the first increase since before the pandemic. The Bank then moved the policy rate up rapidly to cool inflation and help prevent high inflation from becoming embedded in people’s expectations.

3. Front-loading increases to the interest rate: The Bank pursued this strategy of front-loading increases to avoid the need for even higher interest rates later, which would be more painful for the economy and for Canadians. The year ended with the policy rate at 4.25%—its highest level since before the 2008–09 global financial crisis.

4. Removing forward guidance: In the summer of 2020, Canada faced a second wave of COVID‑19, and restrictions on economic activity remained across the country. The Bank implemented extraordinary forward guidance on the policy interest rate, committing to keeping the rate at its lowest possible level until slack in the economy had been absorbed. By January 2022, the Bank's Governing Council judged that this condition had been met, and the Bank announced the end of forward guidance.

5. Cutting the target for its overnight rate to 4.75%: The Bank of Canada cut its benchmark interest rate by a quarter-percentage-point, lowering borrowing costs for households and businesses for the first time in four years and marking a turning point for the Canadian economy after the biggest inflation and interest-rate shock in decades5. This move is expected to kickstart a monetary policy easing cycle that should see interest rates fall further in the coming quarters, offering some relief to borrowers with floating-rate debt, homeowners facing mortgage renewals, and indebted governments.

These measures are aimed at achieving the Bank's top priority of getting inflation back to the 2% target. The Bank has indicated that future decisions about the policy rate will depend on incoming data and judgments about the outlook for inflation3.