Intelligent Investment

Central Banks Take Data Dependent Approach

Canada Monthly Mortgage Commentary

July 31, 2023 2 Minute Read

Global central banks marched onwards towards higher interest rates in July, including the Bank of Canada and Federal Reserve which raised their policy interest rates by 25 bps to 5.00% and 5.25%-5.50%, respectively. While headline inflation in Canada and the U.S. has receded sharply in recent months, both central banks have expressed concerns about underlying core price pressures that remain elevated. The continued persistence of these core inflation measures have also prompted the Bank of Canada to stretch out its inflation outlook. Originally expected to return to target by the end of 2024, the central bank now anticipates inflation will fall to 2.0% about two quarters later in mid-2025.

At the same time, recent economic indicators have given some mixed results that have made it difficult for central banks to establish forward guidance on where interest rates might go. While inflation is largely trending downward, the economy and the labour market in particular have proven surprisingly resilient. However, this has also strengthened the case for a “soft landing” for the economy, despite the rapid rise in interest rates over the last 16 months. In fact, the latest Bank of Canada projections and Federal Reserve statements indicate no expectations for a recession in either economy for 2023.

Given this current environment, central banks have adopted a data dependent approach for interest rates going forward. As it stands, both the Bank of Canada and Federal Reserve remain open to further interest rate hikes if warranted, but will continue to monitor and assess how the economy progresses. As a result, some heightened volatility can be expected over the short term as each new economic datapoint is scrutinized ahead of the central banks’ next scheduled meetings in September.

The uncertainty regarding the future of interest rates has led to some softening of investor enthusiasm in the commercial real estate market, according to CBRE’s Q2 2023 Canadian Cap Rates & Investment Insights report. The market continues to bifurcate with high quality assets seeing the best liquidity while the more troubled sectors are facing financing challenges and tighter credit conditions. Overall, national average cap rates are trending higher with real estate spreads widening closer towards the historical average.

Economic Highlights:

  • Headline inflation fell to 2.8% in June 2023 led by lower gasoline prices year-over-year.
  • Retail sales growth slowed to 0.2% in May 2023 with preliminary estimates for sales to remain unchanged in June.
  • Employment rose by 60,000 jobs in June 2023 and the unemployment rate ticked up slightly to 5.4%.


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