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Another Month, Another Rate Hike

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The Bank of Canada raised rates by 0.50% today, setting the overnight lending rate at 4.25%. Rates are above 4% for the first time in 14 years, and 2022 was the first time ever rates rose or fell more than 3.5% in a calendar year.

Is this end of the increases? It’s unclear, and “reading the tea leaves” of these official announcements is difficult. The statement said the Bank “will be considering whether the policy interest rate needs to rise further.” That’s less emphatic than last time, but still leaves a lot of wiggle room.

Three ways this affects the economy and CRE:

  • Despite rate hikes, the five-year bond yield is the same as it was in mid-August, more than three months ago. Since many loans are priced off this bond, we won’t necessarily see an immediate increase in borrowing costs
  • Assets with low cap rates will be under pressure, as the risk-free return becomes ever larger. For very strong asset classes such as multi-family, or markets with unusually low yields like Vancouver, we may see significant upward movement in cap rates next year.
  • Canada currently has an inverted yield curve, which suggests the market expects rate cuts in the future. A ten-year bond yields about one percent less than a two-year bond, an unprecedented negative value. Historically a longer-term bond yields 1-2% more than a short-term bond. A negative "ten-two spread" suggests much lower rates in the near- to medium-term. BNN has a good explanation here on inverted yield curves.
Summary

As expected, the Bank of Canada raised rates for the 7th time in 2022, in an attempt to control high inflation. Neither the bond market or the currency reacted strongly, suggesting this raise was ”priced in” and expected by investors.

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Pour plus d’informations, veuillez contacter:

Adam Jacobs

Head of Research | Canada

Toronto Downtown

Colliers Canada's head of research, leading a cross-country team of 20 mapping, analytics and research professionals. Formerly head of Canada research at Cushman Wakefield and Director of Analytics at Oxford Properties. Featured in mainstream publications such as the Toronto Star, industry publications and podcasts. Specializing in the big picture and the fundamentals driving real estate - demographics, the macro environment and the global economy. 

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