High immigration rates will allow the Bank of Canada to raise interest rates at a more moderate pace than markets expect, according to the Canadian Imperial Bank of Commerce.

The increased flow of newcomers and their suitability for the needs of the job market “will work to provide the Bank of Canada with some flexibility in the pace of monetary tightening due to the taming impact of new immigrants on wage inflation,” Benjamin Tal, deputy chief economist at CIBC, said Thursday in a report to investors.  

Wage growth in Canada has lagged behind the U.S as their economies have recovered from the Covid-19 crisis, a factor some attribute to the stark differences in immigration policies between the two countries.

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After a pandemic lull, Canada welcomed more than 400,000 immigrants in 2021. Prime Minister Justin Trudeau’s government is weighing an increase to its target of 411,000 this year, and has fast tracked permanent residents for citizenship. 

As the labor market nears full employment, the additional pool of new workers is helping fill record job vacancies and possibly mute wage inflation, even with consumer price gains at the highest in three decades. 

Immigration and its impact on wages give the Bank of Canada “enough justification to hike more slowly than what’s priced in by the market,” Tal said. Trading in overnight swaps suggests six rate hikes are priced in by the end of this year, with a more than 70 per cent chance of the cycle beginning next week. CIBC is forecasting three hikes, likely beginning in April.

Tal also said household formation and the subsequent impact on housing demand could be understated due to the government’s increasing use of permanent residents as a source of immigration.