A Scotiabank economist says “excessive” immigration means many people will have nowhere to live, feeding inflationary pressures and making a spring interest rate cut a foolish policy.Derek Holt, vice-president and head of capital markets economics at Scotiabank, used his December 19 commentary to disagree with market analysts, federal policy and even the Bank of Canada (BoC).“Markets are still attaching significant probability to a March cut and are fully pricing a cut by April,” Holt wrote.“Sorry but I just can’t hop on the bandwagon. In my professional opinion, November’s core inflation readings leaned more toward continued hike risk than toward market pricing for a cut by March/April.”Holt said mass immigration was driving up the prices of everything.“Immigration is excessive, full stop. Canada just added about 431k people in Q3 alone (here). That’s like presto, here’s a new city of London, Ontario created in one quarter. Or almost a new City of Hamilton. A 1.1% quarter over quarter (q/q) nonannualized increase in population in one quarter. StatCan noted that even just the first nine months of this year exceeded population growth for any other year since Confederation in 1867,” Holt noted.“In percentage terms, q/q population growth of 1.1% was the fastest since 1957. Population growth is now at 3.2% year over year (y/y) and the fastest of any peer group major industrialized nation by far. Population has increased by 1.25 million people in just one year and population is 2.29 million higher than two years ago in a country that started with just 38.2 million folks at the time and now has 40.5.”Canada doesn’t have enough housing, goods or services to handle the influx of people, Holt noted, challenging the capacity of infrastructure, thereby causing more public spending and higher prices.“The problem remains that there is little-to-no housing available for them and it’s only going to get worse. Ditto for North America auto inventories and with the retail inventories to sales ratio having come off the depressed bottom during the pandemic to a still lean pre-pandemic level. Ditto for inadequate infrastructure in transportation, in health care services, etc.,” he wrote.Holt pointed out stats far above the 2% sweet spot for BoC inflationary policy. Seasonally adjusted annual rates (SAAR) on key aspects of the Consumer Price Index ranged from 3.5% to 4.9% in November. Also, service prices were up by 5.7% month-over-month SAAR in November. This stat was 10% in October and had a three-month moving average of 6.1%.Holt said “persistent upside risk” of inflation is all anyone should expect with such stats for a variety of reasons.“Wages are absurdly hot in relation to inflation and tumbling labour productivity with one-third of the workforce that is unionized cementing strong wage gains for years to come,” he wrote.Holt wonders if the 430,000 jobs created in 2023 will last, a number matched by the past three months of immigration.“Will there be mass job shedding going forward? One out of two of the jobs created since the start of the pandemic are not going away because they’re all in the public sector absent austerity measures. Labour hoarding is a common theme in the private sector.”Ottawa, it seems, keeps spending when good reasons to do so are long gone.“Fiscal stimulus is ongoing and ages past any such requirements with the threat of more to come as governments re-issue forecasts that tamp down interest expense projections,” Holt warns.“With an election looming by October 2025 and the current government down in the polls, it’s probably rather unlikely they’ll tuck aside any reduced projections for interest expense instead of spending it on other things.”All of this tells Holt that a rate cut in spring would make the Bank of Canada look more overconfident and inept than it does already.“Yeah. Throw rate cuts on top of that at a central bank that can’t forecast inflation to save itself despite its bold commitment to its forecasts. You’ll never cut again afterward or you’ll have to chase inflation higher all over again and lose further credibility as a central bank if cuts are delivered too early and too powerfully. The key message here is to cast aside past cycles and understand the idiosyncratic risks to Canada."Holt also said that rents and shelter costs were soaring in Canada, but that the Bank of Canada’s policy-setting stats overlook this.“Recall that while mortgage interest was up by 1.9% month over month NSA [not seasonally adjusted] and remains hot, it isn't even captured in the trimmed mean and weighted median measures that the BoC uses to operationalize achievement of its 2% headline target,” Holt explained.“Mortgage interest is included in total CPI, but not the measures the BoC focuses upon as gauges of underlying price pressures. In fact, mortgage interest has never been included in trimmed mean and weighted median CPI throughout the entire rate hike cycle.”
A Scotiabank economist says “excessive” immigration means many people will have nowhere to live, feeding inflationary pressures and making a spring interest rate cut a foolish policy.Derek Holt, vice-president and head of capital markets economics at Scotiabank, used his December 19 commentary to disagree with market analysts, federal policy and even the Bank of Canada (BoC).“Markets are still attaching significant probability to a March cut and are fully pricing a cut by April,” Holt wrote.“Sorry but I just can’t hop on the bandwagon. In my professional opinion, November’s core inflation readings leaned more toward continued hike risk than toward market pricing for a cut by March/April.”Holt said mass immigration was driving up the prices of everything.“Immigration is excessive, full stop. Canada just added about 431k people in Q3 alone (here). That’s like presto, here’s a new city of London, Ontario created in one quarter. Or almost a new City of Hamilton. A 1.1% quarter over quarter (q/q) nonannualized increase in population in one quarter. StatCan noted that even just the first nine months of this year exceeded population growth for any other year since Confederation in 1867,” Holt noted.“In percentage terms, q/q population growth of 1.1% was the fastest since 1957. Population growth is now at 3.2% year over year (y/y) and the fastest of any peer group major industrialized nation by far. Population has increased by 1.25 million people in just one year and population is 2.29 million higher than two years ago in a country that started with just 38.2 million folks at the time and now has 40.5.”Canada doesn’t have enough housing, goods or services to handle the influx of people, Holt noted, challenging the capacity of infrastructure, thereby causing more public spending and higher prices.“The problem remains that there is little-to-no housing available for them and it’s only going to get worse. Ditto for North America auto inventories and with the retail inventories to sales ratio having come off the depressed bottom during the pandemic to a still lean pre-pandemic level. Ditto for inadequate infrastructure in transportation, in health care services, etc.,” he wrote.Holt pointed out stats far above the 2% sweet spot for BoC inflationary policy. Seasonally adjusted annual rates (SAAR) on key aspects of the Consumer Price Index ranged from 3.5% to 4.9% in November. Also, service prices were up by 5.7% month-over-month SAAR in November. This stat was 10% in October and had a three-month moving average of 6.1%.Holt said “persistent upside risk” of inflation is all anyone should expect with such stats for a variety of reasons.“Wages are absurdly hot in relation to inflation and tumbling labour productivity with one-third of the workforce that is unionized cementing strong wage gains for years to come,” he wrote.Holt wonders if the 430,000 jobs created in 2023 will last, a number matched by the past three months of immigration.“Will there be mass job shedding going forward? One out of two of the jobs created since the start of the pandemic are not going away because they’re all in the public sector absent austerity measures. Labour hoarding is a common theme in the private sector.”Ottawa, it seems, keeps spending when good reasons to do so are long gone.“Fiscal stimulus is ongoing and ages past any such requirements with the threat of more to come as governments re-issue forecasts that tamp down interest expense projections,” Holt warns.“With an election looming by October 2025 and the current government down in the polls, it’s probably rather unlikely they’ll tuck aside any reduced projections for interest expense instead of spending it on other things.”All of this tells Holt that a rate cut in spring would make the Bank of Canada look more overconfident and inept than it does already.“Yeah. Throw rate cuts on top of that at a central bank that can’t forecast inflation to save itself despite its bold commitment to its forecasts. You’ll never cut again afterward or you’ll have to chase inflation higher all over again and lose further credibility as a central bank if cuts are delivered too early and too powerfully. The key message here is to cast aside past cycles and understand the idiosyncratic risks to Canada."Holt also said that rents and shelter costs were soaring in Canada, but that the Bank of Canada’s policy-setting stats overlook this.“Recall that while mortgage interest was up by 1.9% month over month NSA [not seasonally adjusted] and remains hot, it isn't even captured in the trimmed mean and weighted median measures that the BoC uses to operationalize achievement of its 2% headline target,” Holt explained.“Mortgage interest is included in total CPI, but not the measures the BoC focuses upon as gauges of underlying price pressures. In fact, mortgage interest has never been included in trimmed mean and weighted median CPI throughout the entire rate hike cycle.”
