The role of the Bank of Canada and how it impacts newcomers

The Bank of Canada (BoC) has raised interest rates to their highest level since 2001.

The overnight lending rate is now 4.75%, which is 25 basis points higher than it was at the previous increase in January this year. The BoC started raising rates in July 2022 when it went from 1.5 % to 2.5%. This means that over one year, the rate has increased by 3.25 percentage points.

The current rate hike comes as something of a surprise to many as BoC Governor Tiff Macklem had said previously that the BoC would try to avoid further increases.

The BoC expected that previous increases would reduce consumer spending to the point where the economy could slow and stabilize. However, the BoC says there have been unexpected increases in spending on interest-sensitive goods, including the housing market.

It also says the labour market remains tight and that immigration and participation rates have expanded the supply of workers, who are being hired quickly. This means that there continues to be high demand on Canada’s economy.

The BoC has maintained a high interest rate in recent months to slow consumer spending and reduce the level of inflation, which currently stands at 4.4%. Theoretically, less spending means there is less demand for products and services. This means that businesses don’t need to work as hard to meet the needs of consumers and can (or need to) lower their prices.

How do high interest rates impact newcomers?

Higher interest rates mean it is more expensive to borrow money from Canada’s banks to make large purchases, such as a mortgage or a car.

Making mortgages more expensive can make it difficult for newcomers to Canada to purchase a home. This often results in many newcomers renting their first home instead of buying, but that can also be expensive. For example, according to Zumper.ca the current average rental price of a one-bedroom apartment in Toronto is currently $2,425 per month.

Canada’s tight labour market is also creating demand for skilled newcomers. According to the Immigration Levels Plan, Canada will welcome 500,000 new permanent residents each year by 2025. This number is high in part because several employment sectors are dealing with a shortage of skilled workers.

To help Canada reach its immigration targets while also filling these gaps, Immigration, Refugees, and Citizenship Canada (IRCC) is expected to begin holding new category-based selection draws later this summer for Express Entry candidates with work experience in specific high-demand occupations.

Still, more people can lead to more spending and demand for goods, services and housing which could make it more challenging to bring down interest rates. It is not known how the BoC will adapt moving forward.