A Narrower Path for a Soft Landing
Canada Monthly Mortgage Commentary
October 31, 2023 2 Minute Read
In an environment where economic indicators have been mixed of late, the Bank of Canada decided to maintain its pause on interest rate hikes and held its policy rate at 5.00%. Despite warning that interest rates could go higher, particularly if core inflation does not show more signs of downward momentum, the central bank’s revised projections for a slower economy reinforces the expectation that it is most likely finished with interest rate increases.
The Canadian economic outlook has weakened over recent months as growing evidence points to past interest rate hikes slowing activity and reducing demand levels. Accordingly, the Bank of Canada cut its GDP growth projection for Q3 2023 nearly in half to 0.8% annualized and lowered the full year growth for 2024 from 1.8% to 1.2%. Overall, the economy is now expected to enter a slightly longer period of lower growth through to most of 2024. A recession is not officially forecast by the Bank of Canada, however, given the slim margins of positive growth being projected, the central bank acknowledges there remains a chance for “two or three small negative quarters.”
Recent volatility in headline inflation and little progress on core measures also prompted revisions to the central bank’s inflation forecast. Inflation is projected to average 3.0% throughout 2024, up from the 2.5% previously forecast, and is expected to return to target slightly later sometime in the second half of 2025 instead of mid-2025.
Overall, the Canadian economy appears to be entering a period of slower growth while inflation continues to run hotter for a little longer. The weaker economy is expected to eventually bring inflation under control and remove the need for further interest rate hikes according to the current consensus of the major Canadian bank economic groups. If the economy also progresses as expected over the next few quarters, Canada would remain on the path towards a soft landing, albeit with the caveat from the central bank that the path “has gotten narrower.”
The weaker economic outlook will continue to have implications for the Canadian commercial real estate market. Elevated interest rates have hampered market activity and make for a challenging valuation environment, particularly in the office and land sectors. Meanwhile, food-anchored retail, industrial and multifamily assets continue to see stronger levels of activity, providing more datapoints and conviction in pricing. Accordingly, the debt markets are proceeding with an abundance of caution and adjusting to higher bond yields as well as more restrictive credit conditions.
- Headline inflation slowed slightly to 3.8% in September 2023 with the core CPI-median and CPI-trim measures also easing to 3.8% and 3.7%, respectively.
- Employment rose by 63,800 jobs in September 2023 and the unemployment rate held steady at 5.5%.
- GDP was unchanged in July 2023 with preliminary estimates for a marginal 0.1% increase in August 2023.
- Bank of Canada holds rate steady, trims growth forecast as inflation risks rise
- Loonie Drops to 7-Month Low After Bank of Canada Holds Rates
- Bank of Canada maintains policy rate, continues quantitative tightening
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Bond yields have fallen over the last few weeks as the latest economic indicators strengthen the case for the end of interest rate hikes.
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