A Scotiabank economist has warned that Canada’s rapid population growth is adding significant pressure to inflation and that further interest rate hikes are a real possibility, despite predictions to the contrary. The latest inflation data evaluating a surge in population growth in Canada was discussed in a note by Derek Holt, vice-president and head of capital markets economics at Scotiabank. According to Holt, Canada’s rapid population growth is only adding to inflationary pressures and must be addressed. On Dec. 19, Statistics Canada released information on population growth for the third quarter, reporting that the country added 430,635 people, the fastest quarterly growth seen since 1957 when the post-war baby boom and high immigration following the 1956 Hungarian Revolution accounted for the increased growth.
Mr. Holt pointed out that the problem lies in the lack of housing available for newcomers, a situation that is only expected to worsen. He remarked that the country’s excessive immigration levels, which accounted for a population increase of approximately 431,000 people in one quarter, are contributing to the housing and inflation concerns. The Liberal government has mainly focused on measures to increase the housing supply in order to address shortages, avoiding naming immigration as a factor in the housing crisis. Prime Minister Justin Trudeau has referred to immigration as an “economic advantage,” asserting that the administration is “constantly looking at some of the challenges that are being faced.”
Addressing the latest inflation reading of 3.1 percent, Mr. Holt raised concerns about weak predictions of a central bank rate cut in the spring. He suggested that November’s core inflation readings lean more towards a continued hike risk than towards the market’s prediction of a cut by March/April. The Bank of Canada has held its policy rate at 5 percent since its last 25 basis points hike in July, despite the drop in inflation from its peak of 8.1 percent in June 2022. Bank of Canada Governor Tiff Macklem stated in a year-end speech that it was too early to consider cutting the policy rate, citing the bank’s aim to bring down inflation to 2 percent as the primary concern. When asked about the risks of delaying rate cuts, Mr. Macklem acknowledged that there are “risks on both sides” and insisted on the importance of not making the mistake of allowing high and variable inflation.