The Bank of Canada‘s leaders spent “considerable time” discussing the country’s booming population during their latest policy deliberations, concluding that surging immigration could be making the labour market look tighter than it actually is.

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Governor Tiff Macklem and his deputies opted to leave the benchmark interest rate unchanged on April 12, but not before puzzling over Canada jobs data that show hiring had remained strong despite their best efforts to slow the economy with higher interest rates.

The central bank’s models would have predicted a higher unemployment rate after a series of interest rate increases that rank among the most aggressive in the institution’s history. Instead, the jobless rate was hovering around five per cent, low by Canadian standards. The resilience could help smooth a path to a softer landing, but it could also be another wrench in the Bank of Canada’s plan to bring inflation back to target.

Policymakers flirted with raising the benchmark interest rate during their deliberations, according to the summary of those discussions, released April 26.

One of the reasons they opted to leave rates unchanged was their conclusion that the rapid run-up in population — the country added about one million new residents in 2022 — was probably making the labour market look stronger than it was in reality.

The Bank of Canada needs to understand what’s going on because the population will balloon even more if Canada reaches its target of admitting 1.4 million immigrants into the country over the next three years. That would be good news for business owners who have been struggling for years to fill open positions, but it could also contribute to elevated price pressures if supply fails to keep up with demand.

“Governing Council members acknowledged that while this was helping to alleviate labour pressures, it added to demand as well as supply, given that newcomers to Canada are also consumers,” the summary said.

Policymakers concluded that the rush of new workers could be masking the effect of higher borrowing costs on household spending. They noted that a growing population pushed up overall consumption, but consumption on a per capita basis had been weakening. Macklem and his deputies agreed that consumer spending would fall in the latter half of the year and would remain subdued next year after a series of aggressive rate hikes.

“In this context, the strong hiring numbers in the Labour Force Survey in recent months were perhaps not surprising,” the summary said. “With faster population growth, employment growth could be stronger than the historical trend without adding to labour market tightness.”

While policymakers persuaded themselves that the economy was cooling, they nonetheless spent time discussing whether monetary policy would need to be “restrictive for longer” to get inflation back to the two per cent target. They were confused by market pricing that showed many investors anticipated rate cuts later this year, and they attempted to figure out what traders were seeing.

Central bankers determined that one rationale for rate cuts was that some investors anticipate a “severe economic contraction” that would force the Bank of Canada to reverse course. Another possibility could be that investors think inflation will ease back to normal, allowing monetary policy to adjust.

Policymakers see neither of those things happening. “Governing Council members agreed that while a risk of a sharper slowdown remains, based on their current outlook, cutting rates later this year did not seem to be the most likely scenario,” the summary said.

• Email: shughes@postmedia.com | Twitter: StephHughes95