Intelligent Investment
Interest Rate Cut Cycle Sprouts Investment Green Shoots
Canada Monthly Market Commentary
July 30, 2024 2 Minute Read
The Canadian economy is now firmly on its interest rate cutting cycle after back-to-back decreases by the Bank of Canada, cumulatively lowering the policy interest rate to 4.50%. Future interest rate cuts will be data dependent according to the central bank, however, a notable shift in tone suggests more decreases are likely over the coming months. For the first time this cycle, the Bank of Canada has expressed being “equally concerned” with inflation falling below target as with it being above target. This new focus on the downside risks to inflation highlights the central bank’s growing concern that the economy could be weaker than expected. Accordingly, the Bank of Canada has noted that it would be “reasonable to expect further cuts” in the policy interest rate, on the condition that inflation continues to ease in line with the central bank’s forecast. As it stands, current market and economist expectations call for two more cuts to bring the policy interest rate to 4.00% before the end of the year.
With the prospect of continued interest rate cuts over the coming quarters, it appears commercial real estate cap rates are stabilizing. According to CBRE’s Q2 2024 Canada Cap Rates & Investment Insights report, real estate yields effectively held flat last quarter, with most sectors and markets unchanged or recording only marginal movements quarter-over-quarter.
Similarly, there are early signs that the real estate investment market could be troughing with activity slowly starting to improve. A more accommodating interest rate and credit market could entice capital off the sidelines and see stronger deal velocity throughout the remainder of 2024. In fact, property listings are beginning to increase and will be a bellwether for investor appetite in the current environment. While asset prices are still adjusting and challenges will linger over the short term, the combination of lower interest rates, slowing cap rate increases and improving market fundamentals could spark the beginning of positive momentum for real estate investment going forward.
Economic Highlights:
- Employment fell by 1,400 jobs in June 2024 and the unemployment rate rose to its highest level since January 2022 to 6.4%.
- Headline inflation cooled to 2.7% in June 2024 while the average of the core measures CPI-Trim and CPI-Median also eased slightly to 2.75%.
- Retail sales likely fell 0.3% in June 2024 according to advanced estimates, following the 0.8% decline recorded in May 2024.
Viewpoints:
- Bank of Canada cuts key rate to 4.5%, tees up additional easing with focus on downside risks
- Bank of Canada changes tune as consumers show they’re hurting
- Has Canadian Commercial Real Estate Investment Reached Bottom?
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