Canada Monetary Policy

Bank of Canada Maintains Policy
Rate in Widely Expected Move

Bank remains tight-lipped. Canada’s central bank held its overnight rate at 5.0 per cent for the fifth consecutive meeting and continued quantitative tightening. In the Bank of Canada’s communications, while giving little away, it did appear to be gaining more confidence that inflation is moving in the right direction. The Bank cited that the economy grew in the fourth quarter by more than it expected, but the pace remained weak and below potential. The labour market was also mentioned, with the Bank stating that employment continues to grow more slowly than the population, and there are now signs that wage pressures may be easing. Altogether, the BoC reiterated that the economy is operating in a position of excess supply. However, despite these signs of a slowing economy — along with inflation returning to the Bank’s target range in January — the monetary authority is still concerned about overall price pressures. 

Mid-year cut remains likely. Despite a lack of guidance on future rate decisions, a mid-year cut still holds as a likely outcome. While the market as well as some economists were penciling in a small chance of an April cut, that scenario has becoming unlikely following today’s policy announcement. The BoC stated that it is still too early to consider lowering the policy rate as core inflation measures are in the 3.0 to 3.5 per cent range and that the share of CPI components growing above 3.0 per cent remains higher than the historical average. Nevertheless, despite uncertainty around the timing of future cuts, there is no indication that the BoC will hike its overnight rate again. This stabilization in financing costs will likely foster growing optimism among commercial real estate investors.

Commercial Real Estate Outlook

Investor confidence to grow as borrowing costs fall. The Bank of Canada has held its policy rate at 5.0 per cent since September 2023. While remaining concerned about underlying inflation pressures, the monetary authority has become increasingly dovish. Due to this, bond yields have largely been trending down since October, providing moderate relief for those looking to finance commercial real estate investments. In addition, mortgage spreads are tightening for preferred products such as industrial and anchored-retail. The market is also beginning to see an uptick in opportunistic buyers for development as land financing is becoming slightly more available. Due to this, commercial real estate investment activity has started to gain momentum. Total dollar volume transacted increased 5.2 per cent quarter over quarter in the final three months of 2023, which translated into a 10 per cent year-over-year gain. However, it is important to note that borrowing costs still remain volatile and in restrictive territory, keeping many potential buyers on the sidelines.

Economic growth to benefit commercial real estate. Canada’s economy returned to positive growth territory in the final quarter of 2023, expanding at a 1.0 per cent annualized rate. While this gain did increase the likelihood of a soft landing, GDP growth was well below potential. This will likely support the belief that interest rates will fall over the latter parts of this year. As a result, GDP growth may gain momentum in the second half of 2024, and likely outperform potential in 2025. This overall economic growth will drive commercial real estate space demand across the property spectrum and further support growing investor confidence.  

* Through January; ** Forecast provided by Capital Economics 
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Capital Economics; CoStar Group, Inc.; Statistics Canada