Yahoo Finance Immigration likely has 'neutral' effect on inflation: Macklem
High immigration affects different areas of the economy at different speeds, he says
Despite Canada's ballooning population from the federal government's ramped-up immigration policy, the head of the country's central bank says the impact on inflation is likely neutral.
"The short answer is that, on net, it's probably roughly neutral, but it is affecting different parts of the economy differently,” Tiff Macklem, governor of the Bank of Canada, said in a press conference on Wednesday.
On one hand, increased immigration adds to Canada's worker pool and is helping to ease some of the pressures on wages and operational constraints, Macklem says.
On the other hand, however, having more newcomers means more demand for consumer products and housing.
Housing affordability in particular has been an increasingly hot-button topic in Ottawa as ultra-low supply and high demand have resulted in surging rental prices and a rebound in home sale prices.
The federal government raised its annual immigration targets last November, gradually aiming to welcome as many as 500,000 new permanent residents in 2025.
"It's hard to know exactly what the net effect is. But I think the main message is that it's adding to both demand and supply. If you start in an economy with excess demand, and you add both demand and supply, you're still in excess demand," he said.
"What we're seeing is that the excess demand in the economy is more persistent than we thought. And we've raised rates in June and July and it's taking a little longer to get inflation back to target."
The Bank of Canada hiked its overnight interest rate to five per cent on Wednesday, bringing the rate to a 22-year high.
The central bank has been battling a stronger-than-expected economy and stubborn inflation. It doesn't see inflation returning to its two per cent target until the middle of 2025 now, about six months later than its forecasts earlier this year.
Doug Porter, chief economist at BMO Capital Markets, says he mostly agrees with Macklem's assessment of the impact of immigration on inflation, but adds there's likely upward pressure in the near term.
"One can make the case that some of the factors that push up inflation from faster population growth kick in quickly – increased spending and housing demand – while factors that can help restrain it – increased skilled labour supply – may take a little longer," he said via email.
Porter also points out higher immigration is likely not neutral for interest rates.
"The net addition to real growth from faster population increases could put some upward pressure on so-called natural interest rates," he said.
"Looking longer term, there clearly is a positive relationship between real home prices and population growth, but the relationship between inflation and population growth across economies is a bit less clear-cut."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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