Posthaste: Uh-oh, a new reason why the Bank of Canada might hesitate to cut rates

The debate over whether the

Bank of Canada

will cut interest rates again rages on as economists pore over the latest economic data, forecasts and hints on what the U.S. Federal Reserve will do next.

Canada’s

central bank signalled

after its cut last month that 2.25 per cent might be the right level if the economy operates in line with its forecast.

Now, however, a fresh factor has popped into the equation, say economists at Capital Economics — Canada’s new

immigration targets.

Last week Prime Minister Mark Carney’s government committed to bringing down the share of temporary residents to less than 5 per cent by 2027, a year later than his predecessor Justin Trudeau had originally laid out.

To accomplish this fewer people have to come into the country and more have to leave. Since managing how many people actually depart Canada can be difficult, the government chose to slash the number of new temporary residents by 43 per cent from about 674,000 in 2025 to 385,000 in 2026. Unlike last year’s plan, this year’s report to Parliament on immigration contained no guidance on how many people it expected to leave the country.

Capital’s deputy chief North America economist Stephen Brown estimates the federal government would meet its target if around 825,000 temporary residents left in 2027 and 2026. This seems doable because outflows were 740,000 annualized in the first half of this year, he said.

Such a migration would reduce Canada’s

population growth

to essentially zero over the next two years, which is weaker than the Bank of Canada’s prediction of 0.5 per cent growth.

Last week’s announcement raises the chance that the central bank will again lower its forecast for economic growth, but “the more likely outcome of lower immigration is that it will cause the unemployment rate to fall faster than we forecast,” said Brown.

Economists were taken by surprise this past Friday when

Canada’s jobless rate fell

from 7.1 per cent to 6.9 per cent in October. The gain of 67,000 jobs blasted past expectations of a loss of 5,000 jobs.

It was enough to persuade many that the bank would not cut in December and perhaps for even longer.

Canada’s new immigration targets could further tip the balance.

In its October monetary policy report the central bank estimated that the breakeven employment growth rate will fall to 5,000 jobs a month or 0.3 per cent year over year, said Capital.

However, if population growth is zero, an unusual situation could arise where  breakeven employment would be negative, about -5,000 jobs a month.

“In that environment, the unemployment rate would fall by 0.2 percentage points per year even if there were no net job creation,” said Brown.

Such an outcome would make the central bank even more concerned that lower interest rates would spark a rise in inflation.

“Given the lack of any meaningful fiscal stimulus in the budget last week, these new immigration targets are the bigger risk to our view that the Bank will resume cutting interest rates next year,” he said.

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Ottawa isn’t the only one running up a deeper deficit this year; the provinces are getting into the act as well.

Including the $13.5 billion forecast by Ontario last week, the provinces’ combined budget deficit is on track for $47 billion or 1.5 per cent of gross domestic product in the fiscal year 2025/26, said Robert Kavcic, senior economist with BMO Capital Markets.

Adding in the 2.5 per cent at the federal level amounts to a total government deficit of 3.9 per cent of GDP — the largest shortfall outside the pandemic since the Great Financial Crisis in the fiscal year 2009/10.

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Read on for his suggestions

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s

Financial Post column

can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his

mortgage rate page

for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, Canadian Press and Bloomberg.

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