Research Brief
Canada Monetary Policy
September 2024
Central Bank Lowers Rates, Aiding Growth
and Creating More Balanced CRE Outlook
Bank of Canada followed up with a third rate cut. Facing the sustained easing of inflationary pressures and slack in the labour market, the Bank of Canada (BOC) lowered the overnight rate by another 25 basis points at its September meeting. With recent indicators pointing to weaker-than-expected economic growth in the third quarter, Governor Tiff Macklem struck a dovish tone at the press conference, stressing that the monetary authority is alert to the risks of an overly weak economy and inflation falling below target. Lower interest rates will moderate increases in mortgage interest costs, the main contributor to the current above-target price growth. As shelter inflation tempers, overall price pressures are expected to remain on a downward trajectory in the near term. This will pave the way for further rate cuts by the central bank to maintain a healthy level of economic growth while keeping inflation in check.
Deeper and faster rate reduction anticipated by the market. The weaker near-term growth outlook has prompted market participants to lower their near-term policy rate expectations, with the overnight rate projected to fall below 3.0 per cent by mid-2025. This will bring the policy rate down to the neutral range, where borrowing costs are neither restrictive nor stimulative for the economy. Additionally, many economists have a base case scenario of a 25-basis-point cut at each of the remaining policy meetings in 2024. Yet, the BOC could deliver a larger rate reduction if it sees a rapid deterioration in the economy leading to inflation undershooting its target.
Commercial Real Estate Outlook
Lower rates contribute to rebalancing in multifamily market. With the near-term interest rate path becoming more certain, many borrowers have chosen to remain on the sidelines, waiting for a more optimal time to enter the housing market. As a result, home sales have yet to recover, with the number of transactions continuing to decline year-over-year in metros like Toronto and Vancouver. However, as one of the most interest rate-sensitive segments of the Canadian economy, the homeownership market is expected to experience renewed buyer interest as borrowing costs decrease to less restrictive levels. Coupled with a rise in new supply and slowing population growth due to the federal government tightening their immigration policy, this shifting dynamic is expected to relieve some pressure from the rental market. Consequently, the multifamily vacancy rate is forecast to drop only marginally this year.
Industrial vacancy to stabilize. Over the past six quarters, the industrial sector saw moderating space demand due to elevated interest rates, together with rising completions. Although the vacancy rate edged back up to 3.0 per cent in the second quarter of 2024, this upward trend may level off in the coming years. Lower interest rates are expected to drive a major recovery in consumer spending, boosting space demand related to e-commerce. Moreover, stronger road networks with the U.S. and increased investment in data centres could fuel future growth, particularly in Southwestern Ontario and Montreal. This will help stabilize the vacancy rate at a higher and healthier level over the next few years. The measure had dropped below 1.0 per cent in select markets post-pandemic.
* Forecast
Sources: Altus Data Solutions; Bank of Canada; Capital Economics