Central Bank Central
Highlights
· Central bank policy changes
· Long-yield responses
· Growth versus inflation
· Cap rate outlook
· CRE returns cycle
Welcome back readers to another edition of BGO 's The Chief Economist. With the ongoing lack of US government data, we are using the shutdown as an opportunity to launch another new quarterly. Once per quarter we will look at three key issues:
This is not intended to provide a comprehensive view of global central banks. Instead, we will discuss the regions of the world where we have a strong investment focus, which could change over time.
US Federal Reserve
Last week, the Federal Reserve (Fed) cut the fed funds rate by 25 basis points (bps), bringing the target rate down to the 3.75%-4.00% range, the high end of its estimate of neutral. Some dissent and Chair Powell’s comments make another cut this year seem less certain. That caused the 10-year Treasury yield to back up a bit, heading above 4%. The Fed also announced that it would end quantitative tightening (QT) on December 1, reinvesting proceeds from payoffs and no longer allowing its balance sheet to contract. In the short run, we expect little downward pressure on the 10-year yield, especially as the Fed’s balance sheet shifts to shorter duration. But, if the Fed begins another round of Quantitative Easing (QE), that could push down long Treasury yields. We built a machine-learning model to estimate the probability and impact of such a move and currently estimate a 30%-35% chance of QE starting by the end of 2027, which could push the 10-year down by another 25-50 bps, ceteris paribus.
Bank of Canada
Also last week, the Bank of Canada (BoC) cut the target rate for the overnight rate by 25 bps to 2.25%. The bank’s guidance implies that it is likely nearing the end of this easing phase, given the limited ability of monetary policy to address exogenous shocks stemming from US trade policy. With economic growth subdued heading into 2026 and inflation tracking near 2% (even with some recent resurgence), the bar for further rate cuts, absent softer data, is quite high. Consequently, the Canadian 10-year yield is now likely range-bound, in low-3% range, with drift lower only if U.S. duration rallies or domestic economic data undershoot.
Bank of England
The Bank of England (BoE) held the Bank Rate steady at 4.0% at its last meeting in September. It also reduced the QT pace to £70bn over 12 months, with sales skewed away from the long end to limit gilt-market stress. In the near term, the bank will have to watch services inflation and wages, making BoE cautious and likely to hold longer before any next move. Further rate cuts seem more likely in 2026. The UK 10-year could settle down into a 4.2%–4.6% baseline - slower QT and reduced long-end sales help cap the term premium unless growth or supply surprises.
European Central Bank
Last week the European Central Bank (ECB) kept the deposit rate on hold at 2%. With inflation near the 2% medium-term target and economic growth resilient, the bank felt no change was appropriate. The outlook for the deposit rate looks flat, with the ECB likely sidelined in the near term. Some scope for 2026 easing exists, but only if activity cools. For the 10-year bund the future looks sideways-to-lower if growth softens further; the bank’s policy stance itself is not adding upward pressure to longer-maturity yields.
Bank of Japan
The Bank of Japan (BoJ) also met last week and left its policy rate unchanged at 0.5%. Notably, two dissents favored hiking 0.75%. With inflation currently gliding toward 2% the BoJ can be patient, watching wages and inflation dynamics. But the BoJ remains a bit of an outlier among major central banks, with the chance of further rate hikes modest but alive depending upon economic context, potentially to 1%. The JGB 10-year has been a bit rangebound (roughly 1.6%–1.7%) but upside risk toward 1.8%–2.0% remains in place if hikes resume and the term premium edges up.
CRE Implications
At this stage of the CRE cycle, so much hinges on the trajectory of interest rates, especially at the long end of the curve. Around the world, term premiums are not collapsing, at least not yet, but yields have come in a bit, along with central bank easing. Our proprietary cap rate forecasting model (using both time-series econometrics and machine-learning techniques) suggests further cap rate compression ahead, across geographies, but to varying degrees. Even in Japan, the outlier among the major central banks examined here, the outlook for cap rates looks cautiously positive. But the path forward around the world will depend heavily on the battle of growth vs. inflation. Moderate growth that lowers 10-year yields, but leaves rent growth intact should provide cap rates with a tailwind. If inflation persists, pushing 10-year yields up marginally, cap rates would still likely compress, but at a slower rate. If growth slows significantly or contracts, central banks would cut rates, which would support cap rate compression, even if a weaker economy means weaker space-market fundamentals.
The common theme in the scenarios above, of course, is cap rate compression. The cyclicality of CRE capital markets, which are in a nascent stage of recovery, reinforces our modeling. And that bodes well for CRE returns over the medium term. We remind everyone of a key CRE returns dynamic – when the major respective central bank of a country or region stops raising interest rates, total CRE returns quickly revert from negative to positive. And once rate cuts begin that process accelerates. This phenomenon is playing out again this cycle, and we see no reason why it should not continue. Central bank policy portends even better returns ahead, irrespective of the exact economic path forward.
That's all from my desk, for now. You can bet I'll be back with lots more so please subscribe if you haven't already and be sure to check back in to catch the latest from the BGO research team. Thank you for making us a part of your weekly reading!
Ryan S.
BentallGreenOak (“BGO” or “BentallGreenOak”) includes BentallGreenOak (Canada) Limited Partnership, BentallGreenOak (U.S.) Limited Partnership (“BGO U.S.”), their worldwide subsidiaries, and the real estate and commercial mortgage investment groups of certain of their affiliates, all of which comprise a team of real estate professionals spanning multiple legal entities.
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