The Bank of Canada raised its overnight lending rate by 50 basis points Wednesday, a move that could further constrain activity in commercial real estate.
The country's central bank said the move, the seventh hike since March that's raised it to the highest it has been since 2008, was needed because, even with global growth slowing, it is proving more resilient than expected.
"The economy is weakening, but consumption continues to be solid, and the labour market remains overheated. The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events," the central bank said in a statement.
On the real estate front, the bank noted housing market activity continues to decline.
The Toronto Regional Real Estate Board, the largest in the country, said this week that home ownership market activity in November continued to be hurt by higher borrowing costs causing affordability issues. Sales across the region in November were down 49% from a year ago.
The good news is the central bank hinted its rate hike cycle could be nearing an end.
"Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target," the bank said in its statement.
The next scheduled date for announcing the overnight rate target is Jan. 25.
For commercial real estate, the latest hike is expected to continue weighing on investment activity.
"Interest rates should therefore stabilize early in 2023 if they have not done so already, provided that inflation starts to move sustainably downwards from the early part of next year. Rates may even start to fall later in 2023, again, very dependent on the data," said Nick Axford, chief economist of Avison Young, in a commentary. "In the meantime, the latest increase coupled with the quantitative tightening that is also underway represents a significant tightening of financial conditions, which will restrict the flow of credit in the economy. This will act as a further constraint on the commercial real estate sector and housing market, impacting both pricing and transaction volumes."
Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said the market had yet to fully price in a 50-basis-point hike, with many expecting 25 basis points. However, he said that the overall sentiment about a pause in rate increases should temper adverse reactions to the larger hike.
"An early return to lower overnight rates would ease the pressure on sectors likely housing before the full impacts on construction activity would have been felt," said Shenfeld in a commentary. "Part of what the Bank of Canada is counting on to restrain demand is the squeeze that will be felt on households as mortgages renew at higher rates, so it's unlikely to want to provide quick relief on that front."
Carl Gomez, chief economist and head of market analytics with CoStar, said the Bank of Canada largely did what was expected.
"But it appears that there was a large shift in their forward guidance by removing the statement that further rate hikes are required. I take that as a signal that the BoC is close to pivoting, although another 25 basis point hike in January would be their last of this cycle," said Gomez.