Intelligent Investment

Easing Off The Brakes

Canada Monthly Mortgage Commentary

October 27, 2022 2 Minute Read

Amid growing recession expectations and mounting political criticism, the Bank of Canada pushed forward this month in its fight against inflation with a 50 bps increase to its policy rate. This brings the current policy interest rate to 3.75%, distinguishing this period as one of the fastest rate hike cycles in Canadian history. However, while the central bank reiterated that interest rates may still need to rise further, it appears willing to ease the pace of future adjustments.

This latest move by the Bank of Canada was smaller than expected and officials expressed concerns of potentially slowing the economy “more than needed.” The impact of higher interest rates on the economy are becoming more evident with weakening economic indicators, inflation remains unacceptably high. Household spending has slowed, the housing market continues to cool and consumer as well as business sentiment has weakened significantly. Meanwhile, inflation permeates from goods to services while near-term expectations remain high and at risk of becoming entrenched.

In its latest projections, the Bank of Canada expects economic growth to stall over the next couple of quarters. The central bank’s forecast for GDP growth next year has been halved to 0.9% from the 1.8% expected previously. It also assesses the chances of a technical recession in 2023 at roughly 50%. In terms of inflation, the central bank anticipates it will significantly moderate throughout next year, falling to around 3% by the end of 2023. The Bank of Canada’s current expectation is for inflation to return to target by the end of 2024, suggesting interest rates and the cost of debt will likely be elevated for most of the next two years.

Anticipated near-zero growth will have an impact on real estate decisions and temper investment activity over the next few quarters. Institutional capital has adopted a “wait-and-see” approach as it reassess the market in context with the economic outlook. With interest rates expected to rise further, the dynamic tension in cap rates will continue to be pressured over the near term. However, high quality assets featuring acceptable rental growth characteristics remain in demand, softening some of the impact from rising cap rates.

Economic Highlights:

  • Headline inflation cooled slightly to 6.9% in September 2022 mostly due to lower gasoline prices. Meanwhile, core inflation continued to rise to 5.4%. 
  • Preliminary estimates for retail sales show a decline of 0.5% in September 2022 following the 0.7% gain in August.
  • Employment rose slightly by 21,100 jobs in September 2022 and the unemployment rate compressed to 5.2%.