The Bank of Canada held its overnight lending rate steady in a move that left some property industry professionals unsatisfied and looking for further reductions.
Following a decision in April to pause rate cuts for the first time in a year, the central bank said Wednesday it is keeping its trend-setting rate at 2.75%. The Canadian central bank has already cut its overnight lending rate 225 basis points, more than any other developed country's central bank, except for the Bank of New Zealand, which has reduced its overnight lending rate by the same amount, according to the Bank of Montreal.
Canadian real estate executives said U.S. President Donald Trump's latest threat to raise tariffs on steel and aluminum imported into the country to 50% will adversely affect Canada's economy, as Canada is the largest supplier of both of those metals to the United States. While some commercial real estate professionals said they expected the central bank's decision to keep rates where they are, they were disappointed nonetheless.
"They made a mistake," said Christopher Wein, chief operating officer of Burlington, Ontario-based multifamily company Equiton, in an interview with CoStar News. "We need another quarter point, not because it moves the dial so much as it builds confidence. Canadian consumer confidence has to be at an all-time low or 10-year low."
Canada's central bank most recently reduced its overnight lending rate by 25 basis points in March and again on Jan. 29. Last year, the Bank of Canada lowered interest rates in June, July, September, October and December.
Bank of Canada Governor Tiff Macklem left open the possibility of lower rates later this year but did not provide specific conditions for a further hike. The central bank's next decision is expected on July 30.
More rate cuts expected this year
Money markets and economists are still factoring in at least two more rate cuts by year-end, Marcus & Millichap said Wednesday.
"Further cuts to the overnight rate will have some advantages for commercial real estate investors. These include lower borrowing costs for those with variable-rate mortgages, as well as some benefits for those who use shorter-term money like developers," Marcus & Millichap said in a note. "Regarding property sales, however, the cost of borrowing is priced around longer-term money such as the five- and 10-year bond yield. Given tariffs being inflationary, along with the prospects of larger government deficits associated with tariff-related bailouts, some of Canada's major banks are forecasting rising bond yields over the coming years."
In explaining its decision not to cut, the Bank of Canada said it is closely monitoring the effect of Trump's fluctuating tariffs.
With uncertainty about U.S. tariffs "still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts," the central bank said in a statement. "We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs."
Equiton's Wein said the lack of confidence in the economy has affected purchases of homes before construction starts in Canada and helped freeze the housing market. "The point of preconstruction purchasing is you are buying at a lower price today than what the product will be delivered to you," said Wein. "People don't believe that formula today. And they have to see that in the resale market."
Canada's largest housing market showed no signs of bucking that trend as the Toronto Regional Real Estate Board reported Wednesday that the average sales price in May was $1,120,879, a 4% decrease from the same month last year. The number of sales dropped 13.3% last month compared to May 2024.
Maintaining workforce stability
Phil Soper, president and CEO of Royal LePage, one of the country's largest residential brokerages, said while inflation remains unpredictable and global trade tensions persist, the Bank of Canada appears focused on maintaining stability as the workforce shows signs of softening.
"Amid ongoing uncertainty, the next few rate announcements will be critical in preserving the balance between keeping inflation under control and a weakening economic outlook," said Soper in a statement to CoStar News. "In the country's most expensive real estate markets, sales activity remains stalled, even as conditions increasingly favour buyers with more inventory and reduced competition. Understandably, many potential buyers remain cautious in the face of economic uncertainty."
Royal Bank of Canada said the arguments for a rate cut included the weakened workforce, particularly in manufacturing, and cooling housing markets. These factors reduce the risk that lower rates would result in surging prices, it said.
"However, the limited data since the BoC’s last decision in April hasn't been entirely negative," said Royal Bank in a commentary.
The Bank of Montreal in an economic note said "the tariffs and trade uncertainty changed the picture for 2025, clouding the economic outlook. The breadth of inflation also picked up in recent months, which should be concerning for policymakers. If inflation softens over the next couple of months, that will open the door to a cut as soon as July, as the economy is expected to show increasing signs of strain from tariff uncertainty."
Jordan Kemp, vice president of development at Graywood Developments, said a rate cut would have helped the property market.
"The last few years, development has been a game of inches, especially on the housing front," said Kemp in an interview with CoStar News. "A rate drop this month or next month won't fundamentally change our outlook over the short or medium term. There is a lot of uncertainty in the world. That is driving a lot of consumer perspectives on jumping into the housing market for new builds."
Kemp said several factors are driving developers and purchasers, including fear of recession, and are affecting where people want to put their money.
"We are certainly on the path to loosening... monetary policy," said Kemp. "It won't make a huge difference whether it happens this month or next, given all the other factors."