What Moved
The Bank of Canada raised its overnight rate by 25 basis points to 5.00% on July 12 — the highest level since 2001. Peak rates had arrived, and alternatives of every kind were now operating in the most restrictive monetary environment in over two decades. The Bank cited still-elevated core inflation and excess demand, but the tone suggested this could be the final hike of the cycle. The cumulative tightening since March 2022 totalled 475 basis points (BoC, Jul 12, 2023).
Canadian CPI for June came in at 2.8% — a dramatic decline from the May reading and approaching the Bank's target range for the first time in over two years (StatsCan, Jul 2023).
Housing markets were stable. July activity was seasonally normal, prices held steady, and the market showed no sign of re-accelerating or deteriorating further. The correction of 2022 had settled into a new equilibrium (CREA, Jul 2023).
Private credit at 5.00% was delivering the highest yields in over a decade. New MIC originations were being made at rates that compensated generously for risk, and the conservative underwriting of 2023 was creating a strong vintage.
What It Means
Five percent — covered in our event-driven analysis — was a psychologically and practically significant milestone. For borrowers, it represented the maximum cost of capital they would need to manage. For lenders, it represented the peak yield environment. For investors, it was the level from which rates would eventually decline.
The immediate implication for private credit was positive in a counterintuitive way. Peak rates meant that the worst of the borrower stress was known. Every borrower in a private credit portfolio had now been tested against 5.00% rates. Those still performing at this level had demonstrated their capacity to service debt through the most challenging rate environment in two decades.
New origination at 5.00% base rates was offering private credit investors the best risk-adjusted returns since before the pandemic. MIC managers originating loans at conservative LTVs, secured by corrected property values, at rates reflecting a 5% base — these were objectively strong lending conditions.
For PE, peak rates meant that the financing environment, while expensive, was at least stable. Sponsors could underwrite deals knowing the cost of capital, rather than guessing where it was heading. This visibility was supporting a pickup in deal activity across Canadian alternative investments more broadly.
What We're Watching
Whether 5.00% was truly the peak would be confirmed by subsequent BoC decisions. The September and October meetings would be critical — holds would confirm the peak, while any further hike would extend the tightening.
The lag effect of rate hikes on the real economy was worth monitoring. Monetary policy operates with a delay, and the full impact of 475bp of tightening was still working through the system.
Private credit deployment data for H1 2023 would show whether managers were taking advantage of the attractive origination environment. Early indications suggested that well-capitalized managers had been actively originating through the first half of the year, building portfolios at yields and risk terms that reflected the new reality.
The wave of mortgage renewals approaching in 2024-2025 — when borrowers who had locked in fixed rates at pandemic-era lows would face dramatically higher renewal rates — also warranted attention. The renewal cliff represented a structural risk to the broader housing market and, by extension, to every private lender with residential mortgage exposure.
Closing
Five percent. The number that defined the peak of the most aggressive tightening cycle in Canadian monetary history. For private market investors, it marked the end of the uncertainty about how high rates would go — and the beginning of the patience required to wait for them to come down. The view from the peak was challenging but clear.
For the full quarterly analysis, see Q3 2023: Peak Rates and the Patience Premium.
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