BOC’s – (The Bank of Canada) interest rate increased recently by up to 4.5% from 4.25% on 7 December 2022, a 25-point basis increase. It is likely that interest rates will remain high for some time despite the smallest inclination over the past year; larger purchases will be more difficult to finance as a result. Even the newest immigrants to the country are affected by this.
Despite Canada’s stable economy, global events still affect its economy. The Bank of Canada attributes the sharp rise in oil, gas, and food prices to increased demand and international issues like Russia’s conflict in Ukraine.
The BoC believes that higher interest rates will have long-term benefits. The increase in the price of goods and services peaked at 8.1% in June of last year due to high-interest rates, which have been shown to slow and reduce inflation.
It has since fallen to 6.9% but remains well below the 2% target. Canada’s newcomers often worry about how they will begin their new lives due to high inflation and increased interest rates.
Canada’s high-interest rate slows the economy and decreases demand
There have been some economic strategies that have shown to be long-term benefits to the economy (while at the same time temporarily driving up consumer prices).
Interest rate increases reduce inflation by reducing demand. Increasing costs cause Canadians to spend less money, which in turn leads to a decline in demand. Consequently, suppliers are more able to meet the demand without increasing prices. Oil and gas providers will be more likely to lower prices if fewer people buy them, and there will be more of them available.
If oil prices decline, corporations can save money because shipping worldwide becomes easier and less expensive. Consumers will benefit from lower costs because Canadians will reduce their spending even as oil prices decline, saving businesses and consumers money.
What happens to the employment rate if demand is lower?
Canada attracts immigrants due to its high employment rate. Due to an elderly population and low fertility rate, various industries in Canada are facing labor shortages.
By 2025, Canada wants to admit 500,000 new permanent residents annually, according to its most ambitious Immigration Levels Plan, which was published in November. A number of industries in Canada continue to experience high unemployment rates, including healthcare, construction, and professional and scientific services. Statistically, the number of workers required in these industries is growing faster than the number of jobs available.
BOC’s – (Bank of Canada Governor) Tiff Macklem emphasized the necessity of hiring immigrants in November. According to him, increasing the supply of workers will balance supply and demand and help reduce the need to control demand. The hiring of immigrants will also help regulate high wages, which is essential for bringing inflation under control according to the BoC.
As credit rates climb and the economy grows more slowly, businesses can increase their supply. Increasing the labor force is frequently necessary to do this. If interest rates and inflation decline again, the nation may find itself back in the same situation as before if there aren’t enough workers to produce enough supply.
Is it going to become harder to purchase a home in Canada?
Residential properties in Canada are currently difficult to come by at a reasonable price. Bank loans and mortgages become more expensive at higher interest rates, since borrowing money from the bank costs more.
In this case, the goal is to bring down house purchase rates to allow for the replenishment of supply or the construction of more homes. New permanent residents and Canadians will still be able to own property, albeit at a higher cost.
As well as that, Canada has just unveiled a new housing policy designed to improve the supply of housing.
Up until 2025, the new Act prohibits citizens and legal residents from buying properties. In Canada, temporary residents have to comply with a few restrictions that can significantly complicate home buying.
Increased BOC’s interest rate affected the costs of living
Canada is an expensive place to move to. When newcomers have already paid for all the application fees and travel expenses, the cost of accommodations, local transportation, and even groceries can seem shocking.
Renters will likely be the majority of newcomers to Canada. It is now the most expensive time for renting in Canada since COVID-19 with the average rent at $2,048 per month, nearly 12% higher than before the pandemic. Rents are going up as a result of rising interest rates and the cost of mortgages, which helps landlords cover costs.
Between 2021 and 2022, food costs rose by an average of 11%. According to the Canadian Food Guide, in 2023, a typical four-person household should budget $16,288 for food.
Canada’s economic outlook
Currently, Canada is experiencing a minor recession which is expected to continue until 2023, according to the Bank of Canada. From 3.6% growth in 2022 to 1% growth in 2023, GDP growth is expected to stagnate.
By the middle of this year, inflation will reach 3%, which is also the target level, according to economists. The BoC anticipates no further increases in the interest rate in the near term, despite uncertainty as to when the rate will fall. However, they are still able to raise rates if required to fight inflation, which will further cut back on consumer spending.
Inflation may remain high in Canada in the short term, at around 5%, and the cost of housing, rent, and groceries is not likely to decrease much. The Bank of Canada predicts that core inflation has peaked in 2024, and the country’s GDP will only grow by a slight amount. Inflation will be lower, resulting in lower prices and a more stable financial situation for both newcomers and Canadians than it is at the moment.
