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Research Brief

Canada Monetary Policy

January 2024

CAN Money

Policy Rate Unchanged in First Decision of
2024 as Bank of Canada Drops Hiking Bias

Central bank maintains policy rate, while turning slightly dovish. In its first policy meeting of 2024, the Bank of Canada held its overnight rate at 5.0 per cent. This marked the fourth consecutive interest rate pause as the BoC stated the economy has now shifted from a position of excess demand to a place of excess supply. Economic growth has stalled since the middle of 2023, consumers have pulled back on spending, and business investment has contracted. Canada’s labour market has also eased, while a slowdown in demand is reducing inflationary pressures. As a result, the central bank dropped its hiking bias by stating that Governing Council’s discussion of monetary policy is shifting from whether the policy rate is restrictive enough to restore price stability to how long it needs to stay at the current level 

Money markets pricing in second quarter rate cut. In its January meeting, the BoC indicated that it believes economic growth will gain momentum in the second half of 2024. For this, consumers will need to see some relief, which could be an early signal to the market that the central bank expects to begin cutting rates in April or June. Initially, money markets slightly pushed back their view that rate cuts will occur as early as April. Prior to the policy announcement, interest rate swap markets were pricing in a 55 per cent chance of an April rate cut. However, directly following the policy announcement, the probability dropped to 45 per cent, with money markets assigning a 77 per cent chance of the first move happening in June. While this probability is set to fluctuate, it is becoming increasingly likely that interest rates will fall  within the first half of 2024.

Commercial Real Estate Outlook

Investment activity set to turn the corner. Positive investor sentiment is set to build over the coming quarters as uncertainty is likely to show further signs of abating heading into the second half of the year. Short-term borrowing costs have largely stabilized, while Canada’s five- and ten-year bond yields have been trending down since October of last year. Combined with healthy fundamentals across most property types and markets, as well as large volumes of deployable investment capital waiting on the sidelines, transaction activity is set to gain momentum. This was already seen in the final quarter of 2023, as total dollar volume edged up slightly on a year-over-year basis as borrowing costs showed early signs of stabilizing in September. This trend is likely to continue over the coming months as more certainty returns to the market, which will aid price recalibration and mitigate expectation gaps between many buyers and sellers.    

Select property types to be preferred among buyers and lenders. While financing conditions are set to ease, supporting an uptick in transaction activity, they will remain elevated when compared to the low interest rate environment seen during the global health crisis. As a result, lenders will continue to be selective in providing debt capital and favour assets that see more liquidity such as industrial, purpose-built rentals and essential-based retail. Not only do these assets have low vacancy rates supporting rent growth, which is forecast to outpace that of inflation, they are also set to benefit from record population growth witnessed over the past year. Consequently, these property types are likely to continue to capture a large share of investment dollars over the coming year.  


* Bond yield and rate intra-day through January 24, 2024; inflation through December 2023 
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada

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