Population growth the “wrinkle” in BoC’s inflation plan

July 11, 2023 | Last updated on July 11, 2023
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As investors await another interest rate decision Wednesday from the Bank of Canada, Canada’s growing population may be the factor tipping the scales in favour of another hike.

A report from TD Economics attributed the central bank’s return to rate hikes in June to data points linked to an expanding population.

“The wrinkle in the BoC’s plan and overall analysis came via population statistics,” TD economists Beata Caranci and James Orlando wrote in a report this week.

“At the time of the announced pause [in March], it was not readily observable that Canada was experiencing a massive demand shock. It turns out that the population expanded by 1.2 million persons over the last year, creating a demand force not seen since the 1950s.”

After raising the overnight interest rate to 4.5% in January, the central bank held steady at its next two meetings to monitor the effect of its rapid hiking over the previous year and the impact on household debt. But where many expected increased interest-rate sensitivity, consumer spending surged and the housing market perked up.

“This puts the central bank into a bind,” the TD report said. “Even though spending per capita has softened, the whole matters more than the parts and the BoC must set policy for economy-wide inflationary forces that are pressing on capacity.”

Meanwhile, employer demand for workers is still strong, with the economy adding another 60,000 jobs in June.

A report from National Bank Financial puts those numbers in context. Canada has added 470,000 jobs over the past year, which is a lot for an economy considered to be in excess demand. However, the report notes that Canada’s population has grown even faster, and that’s why job creation and unemployment are both rising.

“Put another way, surging population — while creating headaches in terms of owned/rental accommodation — is at least keeping a tight labour market from getting tighter,” National Bank said.

This could be positive news for the BoC’s inflation fight. While labour demand is likely to cool, immigration is unlikely to slow at the same pace, which will lead to higher unemployment. “And that, by extension, should mean relatively tamer wage and overall inflationary pressures in Canada,” the report said.