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What population growth means for the economy and inflation

Speaking a day after we decided to hold interest rates steady at 5%, Deputy Governor Toni Gravelle discusses immigration, inflation and the role that newcomers play in helping our economy grow.

Watch Deputy Governor Gravelle speak to the Windsor–Essex Regional Chamber of Commerce. Read the full speech.

Bank maintains policy rate

We decided to hold the policy rate at 5%, largely because monetary policy has been working to cool the economy and relieve price pressures. But we are not yet where we want to be.

Overall, the economy no longer seems to be in a state of excess demand, but we still need to see inflation come down further.

We continue to keep an eye on inflation expectations, wage growth and the pricing behaviour of corporations to help us see if we are on a sustained path back to our 2% target.

More newcomers, more long-term benefits

Canada has one of the fastest-growing populations among advanced economies, thanks largely to immigration. The number of permanent and non-permanent residents we’ve welcomed has risen sharply recently.

This increase in newcomer arrivals is good for Canada, particularly given our aging population. Newcomers have added to our workforce and helped ease critical labour shortages. This has boosted Canada’s potential growth, which will help keep inflation lower in the future.   

Strong immigration since the start of 2022 has helped increase Canada’s workforce…. And the larger workforce has boosted the level of our potential output by 2% to 3% without adding to inflation. This is a significant improvement, especially considering Canada’s otherwise rapidly aging population.”

The impact on inflation

When newcomers move to Canada, they need to buy many necessities to help them get settled. This increases demand for goods and services, which can have an impact on inflation.

Not all newcomers affect the economy in the same way. For instance, because of their high tuition fees, international students typically add to consumption more than many other newcomers. Overall, though, the initial boost to spending from the recent rise in newcomers has had very little impact on inflation.

But newcomers also need housing, and that’s a different story. Canada has long had housing supply challenges for many reasons, including:

  • zoning restrictions
  • lengthy permitting processes
  • a shortage of construction workers

The result is that new housing construction has not kept up with population growth for many years.

With these housing supply challenges, the recent increase in newcomers has added to the pressure on rent and housing prices. And this has affected inflation.

Ultimately, Canada needs more housing, and the recent focus by all levels of government to increase construction is a welcome development.

Canada needs more homes. And we need to make our housing supply more responsive to increases in demand. This will allow us to properly welcome new arrivals and to ensure all Canadians have an affordable place to live.”

Watch Deputy Governor Gravelle answer questions from the media following his speech.

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