Intelligent Investment

Ripple Effects

Canada Monthly Mortgage Commentary

June 28, 2023 2 Minute Read

The Bank of Canada ended its rate hike pause earlier this month and increased the policy interest rate by 25 bps to 4.75% in a surprise move that sent ripple effects throughout global central banks. Preceding that decision, recent economic data had suggested that the factors stoking inflation were once again proving persistent and cumulated in the sudden reversal of the inflation trend. As a result, the Bank of Canada opted to be proactive on concerns that disinflationary momentum could be waning.

Over the weeks that followed, other major global central banks also stepped up their stances on the growing need for tighter monetary policy. The European Central Bank lifted interest rates by 25 bps and effectively guaranteed another increase in July. The Bank of England surprised markets with a 50 bps increase and reiterated its willingness to do whatever is necessary to return inflation to target. The Federal Reserve elected for a temporary pause this month to assess the situation, however, at the same time also indicated the need for even higher interest rates by year-end than previously expected.

With most central banks signaling higher interest rates to come, debt markets have repriced accordingly and revised peak interest rate speculations. In Canada, the shared consensus of major bank economist groups is that interest rates will rise and stay at 5.00% over the remainder of the year. However, the latest inflation result for May showed headline price pressures eased to 3.4% and could lead to adjusted expectations once again. In the U.S., the Federal Reserve has projected that interest rates will likely need to increase another 50 bps to a range of 5.50% - 5.75% by year-end. However, despite the outlook for higher interest rates, economists are still currently projecting relatively soft landings for both the Canadian and U.S. economies with mild recession outlooks over the near term.

Amid the central banks repositioning and revised outlooks for interest rates, the real estate debt market continues to bifurcate. The more troubled sectors are facing financing challenges as well as tighter credit conditions and expanding spreads. But highly sought-after assets such as multifamily, industrial and food-anchored retail are performing well and even seeing some credit spread compression.

Economic Highlights:

  • Headline inflation fell to 3.4% in May 2023, reaching its lowest point since June 2021.
  • Retail sales grew 1.1% in April 2023 with preliminary estimates for another 0.5% gain in May 2023.
  • Employment fell for the first time since in 9 months by 17,300 jobs in May 2023 and the unemployment rate rose to 5.2%.


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