The Bank of Canada held its benchmark interest rate at 2.25% for the fifth time in a row as policymakers weighed rising prices against a softening economy and real estate professionals have looked for a cut this year.
Bank of Canada Governor Tiff Macklem said the central bank is trying to balance those opposing pressures, noting that “economic weakness combined with rising inflation is a dilemma for monetary policy.” He added that holding the rate “balances those risks” for now.
The widely expected decision reinforces a holding pattern on interest rates in place since late 2025. Wednesday's interest rate decision comes as Canada’s commercial property market emerges from a steep slowdown tied to higher borrowing costs, with deal activity starting to pick up again in early 2026.
Overall investment fell 29% from its 2022 peak to $46.2 billion in 2025. But it's beginning to recover as more predictable interest rates bring lenders and institutional investors back into the market.
Macklem pointed to weaker economic data, including a 0.1% decline in gross domestic product in the first quarter, alongside higher inflation driven largely by energy prices.
“Monetary policy continues to be focused on ensuring higher energy prices do not turn into persistent inflation,” he said in a statement. Macklem also said the central bank is committed to keeping inflation near its 2% target over time.
More leasing demand
Leasing has also improved. Office vacancy has begun to decline, falling to about 13.6% nationally as tenants return to higher-quality buildings and new construction slows. Industrial markets are adjusting as well, with vacancy around 5% to 6% after rising through 2024 and 2025, and rents flattening as new supply is absorbed.
In housing markets, the extended pause on rates keeps financing conditions largely unchanged for buyers, lenders and developers adjusting to higher borrowing costs.
“With the Bank of Canada’s latest rate hold, buyers are weighing a wide range of factors in today’s market,” Re/Max Canada President Don Kottick wrote in an email to CoStar News. “In some regions, we’ve seen that decreasing prices, additional inventory and recent HST/GST [harmonized sales tax/goods and services tax] relief are creating more opportunities for buyers to find value that wasn't there a year ago. The result is a more nuanced market, where readiness, timing and local conditions are shaping homebuyer decisions and making local market expertise more important than ever."
Residential inventory has increased in several major markets, while sales activity remains uneven as affordability constraints continue to limit home purchases. Developers have slowed new projects in some regions, particularly where pre-construction sales have weakened and financing remains expensive.
After nearly two decades of low borrowing costs, with the Bank of Canada’s policy rate at or below 2% for much of the post-Great Recession period, the central bank rate moved sharply higher in 2023, lifting rates to 5%. It has since cut back. lowering the rate to the current 2.25% by late 2025. The bank's decision to hold the rate during its past five meetings has left borrowing costs below their peak but still well above pre-pandemic levels.
Royal LePage President and CEO Phil Soper said the central bank is weighing strong job gains against a broader economic slowdown.
“The Bank of Canada finds itself balancing conflicting economic signals,” Soper said in a statement. “On one hand, May’s employment report delivered a surprisingly strong 156,000 new full-time jobs. On the other, Canada has now entered a technical recession following two consecutive quarters of economic contraction."
He added that stable borrowing costs are beginning to support housing activity, with sales picking up in some regions and the potential for further recovery later in the year if economic conditions hold.
U.S.-Iran war fallout
The Bank of Canada pointed to rising global risks, including the ongoing conflict between the United States and Iran in the Middle East and uncertainty around international trade, as key factors shaping its decision to hold rates steady. The U.S. Federal Reserve is expected to hold its key interest rate at the current 3.5% to 3.75% range when it meets next week.
Bank Governor Macklem said higher energy prices and supply disruptions linked to the conflict are “weighing on global growth and pushing up inflation,” adding that the central bank is focused on preventing those pressures from becoming more widespread across the economy. He also said policymakers are contending with elevated uncertainty tied to potential new U.S. tariffs, which continue to cloud the outlook for growth and inflation.
Mitch Strohminger, director of market analytics at CoStar, said the Bank is confronting a difficult mix of slowing growth and rising prices.
“Economic growth has slowed to the point that the country may have entered a technical recession,” he said, noting that two consecutive quarters of contraction would meet that definition. At the same time, inflation has been rising, initially driven by food costs and, more recently, by rising fuel prices tied to the conflict in the Middle East.
Strohminger said the bank now expects inflation to exceed 3% in the near term before easing back toward 2% by early 2027. But, he warned that if policymakers are forced to raise rates again to contain price pressures, “the risk of a recession would rise.”
Cameron Martin, research manager at Cushman & Wakefield’s Global Think Tank, said macro uncertainty remains too high for the central bank to act. He does not expect a rate hike or cut until the CUSMA trade agreement negotiations conclude.
“Ask me again in August,” Martin said in an interview. “There’s so much uncertainty leading into July that the Bank of Canada held the rate to keep its options open. They don’t want to make a decision now, but things could change."
The Bank said it will continue to monitor incoming data, hinting that future rate moves will depend on how inflation and economic conditions evolve.
CoStar News Toronto reporter Neil Sharma contributed to this report.