Intelligent Investment

The Conditional Pause

Canada Monthly Mortgage Commentary

January 30, 2023 2 Minute Read

Last month, the Bank of Canada opened the door to a potential pause in its interest rate hike cycle. Although  inflation was beginning to show signs of cooling, exceptionally strong employment growth in December 2022 pushed the central bank for another 25 bps increase this month. With interest rates now at a 15-year high of 4.50%, the Bank of Canada currently “expects to hold the policy rate at its current level” and monitor the lagged effects of monetary policy on the economy.

This marks the Bank of Canada as the first major central bank to signal a pause, however, it is conditional upon the Canadian economy progressing in line with forecasts. Namely, the central bank expects inflation to fall this year while economic growth stalls for a couple of quarters before picking up again in late 2023. Deviations from this path could bring the Bank of Canada to increase the policy rate further to ensure inflation returns to target.

The central bank’s current outlook puts the odds of a mild, technical recession in 2023 at roughly 50%, bringing back the possibility of a ‘soft landing’ for the economy. However, this sentiment contrasts with financial markets that are pricing in a deeper slowdown that will force the Bank of Canada to start cutting interest rates by late-2023. In either scenario, it would appear interest rates are likely to stay in place for most of the year.

A more stable interest rate environment is expected to bring a return of real estate capital markets activity in 2023. While capitalization rates have risen and are likely to increase further, rates in Canada still remain well below their previous peak in 2009. As well, underwriting conditions have tightened with the cost of capital stabilizing at higher levels. Altogether, price discovery will be a major theme in the real estate sector as buyers and sellers adapt to the new investment environment.

Economic Highlights:

  • Employment rose by 104,000 jobs in December 2022, bringing the unemployment rate to a near-record low of 5.0%.
  • Preliminary estimates for retail sales show a 0.5% increase in December 2022, more than offsetting the 0.1% drop in November.
  • Inflation moderated slightly to 6.3% in December 2022 from the 6.8% recorded in November.

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