The Bank of Canada faces a new complication in its interest rate decision-making process as recent immigration policy changes could significantly impact the country's economic landscape, according to analysis from Capital Economics.
Immigration Targets Reshape Economic Outlook
Prime Minister Mark Carney's government has committed to reducing the share of temporary residents to less than 5% by 2027, implementing a plan that will slash the number of new temporary residents by 43% from approximately 674,000 in 2025 to 385,000 in 2026. This represents a one-year delay from the original timeline set by former Prime Minister Justin Trudeau.
The federal government's latest immigration report notably omitted guidance on expected departure numbers, leaving economists to calculate the potential impacts. Stephen Brown, deputy chief North America economist at Capital Economics, estimates that meeting the government's target would require around 825,000 temporary residents to leave in both 2026 and 2027.
Population Growth Could Stall to Near Zero
This dramatic shift in immigration patterns could reduce Canada's population growth to essentially zero over the next two years, significantly weaker than the Bank of Canada's current prediction of 0.5% growth. Brown considers this outcome achievable, noting that outflows already reached 740,000 annualized in the first half of this year.
The potential population stagnation introduces fresh uncertainty into the central bank's rate-cutting timeline. After reducing rates last month, the Bank of Canada had signaled that 2.25% might be the appropriate level if the economy performed according to its forecasts.
Unemployment Implications Complicate Rate Decisions
Perhaps the most significant impact lies in the unemployment rate dynamics. Capital Economics notes that in its October monetary policy report, the central bank estimated breakeven employment growth would fall to 5,000 jobs monthly or 0.3% year-over-year.
With zero population growth, an unusual scenario emerges where breakeven employment would turn negative at approximately -5,000 jobs per month. In this environment, Brown explains that the unemployment rate would decline by 0.2 percentage points annually even without any net job creation.
This analysis comes after October's surprising jobs report showed Canada's unemployment rate falling from 7.1% to 6.9%, with a gain of 67,000 jobs dramatically exceeding expectations of a 5,000-job loss. The strong employment data had already persuaded many economists that the Bank of Canada would not cut rates in December and potentially maintain higher rates for longer.
The new immigration targets further complicate the central bank's decision-making process, potentially causing the unemployment rate to fall faster than previously forecast and giving policymakers additional reason to hesitate on further rate reductions.
