The BoC announced maintaining stable interest rates at 4.5 percent. The interest rates have remained at 4.5 percent since January 2023 after several increases at the end of 2022. Although the rate is high, the lack of rise in interest rates and the downward inflation rate indicates that the Canadian economy will begin to stabilize. A stable interest rate in Canada implies that newcomers arriving here will be able to fix the standard budget for huge purchases. They must be able to get a consistent return on any GIC.
The BoC announced maintaining stable interest rates
The Bank of Canada’s Governor stated that the existing monetary policy needs limitations for a reduced inflation rate. He even claimed that there is a huge possibility of the interest rates rising up higher, and it was too early to determine anything.
During a Press Conference, Macklem also stated that the benefits of the rising interest rates will not come into effect immediately. This is primarily due to a delay between 18 and 24 months after the execution of these measures. As a result, the prices tend to remain high for Canadians.
Usually, interest rates tend to significantly impact the purchasing capacity of an average Canadian, for instance, buying a car or home.
Canada’s federal government even modified the Non-Canadian Act, preventing non-Canadians and non-permanent residents from purchasing a home in Canada. However, the high-interest rate means that mortgage rates will continue to be high for a while, which may be a reason for worry even for people with a locked-in mortgage rate subject to negotiation.
Currently, a stable interest rate implies that monthly mortgage payments will remain fixed at the same rate. As a result, newcomers and Canadians will be able to plan and budget for the near future.
Restricted labor market and immigration
Macklem reportedly stated that the labor market is restrictive, with an unemployment rate of 5 percent. Meanwhile, businesses began to find labor conveniently due to the solid population growth.
Moreover, he emphasizes that this growth is also due to most employers using the Temporary Foreign Worker Program. The TFWP enables to welcome of a number of more skilled workers, thereby reducing the number of vacancies. As a result, businesses have less pressure on them to meet the demands.
The aging population in Canada is on the rise, while the economy mostly depends on immigration to combat the existing labor shortage gap and to continue with crucial services. Canada seeks immigration to also use the income tax contributions to its advantage.
In November 2022, the Immigration Levels Plan 2023-2025 revealed the high-level targets of 500,000 new Permanent Residents by the end of 2025. Consequently, it will reduce the pressure to search for skilled workers in the healthcare, construction, and professional and technical sectors.
Further, Macklem even talked at length about the benefits of immigration in terms of decreasing inflation. He felt that a rise in immigration would balance supply and demand better.
He went on to state that recruiting more immigrants would eventually lead to higher wages. BoC even claimed that wages must remain slow to control the inflation rate.
BoC interest rates
The existing higher interest rates are a consequence of the previous measures taken at the time of the pandemic. The Bank of Canada purposely reduced the interest rates to reduce the stress faced by Canadians due to the financial crisis; meanwhile, most workplaces remained closed.
Gradually, with the passage of time, the economy regained its strength, and the purchasing potential of people led to a major increase in demand and supply. Consequently, businesses continued to work more and increase the prices to balance the situation. All of this majorly contributed to the rise in the inflation rate.
A rise in interest rates limits spending habits and balances the demand. This further indicates that businesses can reduce their prices in order to reduce the cost of living.
The inflation rate heightened in June 2022 at 8.1 percent, and as a result, it deteriorated to 5.2 percent as of February. The Bank of Canada also estimated that inflation would drop to nearly 3 percent in the mid-year and then further decrease to 2 percent by the latter part of 2024.
