The Bank of Canada lowered rates for the second time this year as concerns continue to grow among commercial real estate professionals and others about the potential impact of U.S.-imposed tariffs on Canada's economy.
With the move, Canada's central bank lowered the overnight rate by 25 basis points to 2.75%. The trend-setting policy rate immediately impacts short-term borrowers with loans tied to prime lending rates.
In January, the central bank reduced the overnight lending rate by 25 basis points. That followed reductions of 50 basis points in December and October. All told, the Bank of Canada cut interest rates five times last year.
"While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing U.S. tariff threats is restraining consumers' spending intentions and businesses' plans to hire and invest," the bank said in a statement.
In a press conference, Bank of Canada Governor Tiff Macklem said, "The pervasive uncertainty" created by continually shifting United States tariff threats has shaken the confidence of consumers and businesses.
"Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity," Macklem said. The governor also emphasized that monetary policy could not offset the impact of a trade war.
Tariff war intensifies
The tariff war between Canada and the United States heated up Wednesday when Canada said it would impose additional retaliatory trade taxes on 21 billion U.S. dollars worth of goods from the United States. The move was in response to the U.S. announcement that "a 25% tariff on steel and aluminum with no exceptions or exemptions will go into effect for Canada and all of our other trading partners at midnight, March 12th."
Commercial real estate, especially the residential sector, has looked to lower rates to lift sales and provide more liquidity through lower borrowing costs.
Alex Avery, CEO of Toronto-based Primaris REIT, said the rate cut had been expected.
"Continued geopolitical uncertainty would suggest further rate cuts, which will help restore property market trading liquidity as short-term interest facilitates more transaction volumes," Avery said in an interview with CoStar News.
Primaris, a retail REIT with a portfolio of 38 properties containing 13.4 million square feet, has remained an active buyer even in the interest rate environment over the last few years. It has bought $2.4 billion, or nearly 1.7 billion United States dollars, worth of malls since the end of 2021.
The economy's volatility, some of it driven by trade issues, continues to weigh heavily on the multifamily sector. The average asking rent for all residential properties in Canada was $2,088 per month in February, a 4.8% decline from a year ago and the largest since April 2021, according to a report from Rentals.ca and Urbanation.
The fifth consecutive month of year-over-year rent decreases brought asking rents to their lowest point since July 2023. However, rents are still 16.9% above pre-pandemic levels.
Sales drop expected
"Rents in Canada are softening as supply is outweighing demand," said Shaun Hildebrand, president of Urbanation, in a commentary. "Apartment completions are currently running at record highs, while at the same time, population growth has slowed and the economy faces heightened risks due to a potential trade war with the U.S. Expect rents to continue decreasing in the near-term as these trends likely remain in place."
Phil Soper, president and CEO of Royal LePage, one of Canada's largest residential brokerages, said that with the North American trade war heating up, a busy spring housing market could see less buying and selling activity.
"In an increasingly turbulent economic environment, this series of rate decreases presents an opening to aspiring homebuyers and those approaching their mortgage renewal," Soper said in a comment emailed to CoStar News. "With substantial tariffs from the United States set to come into effect, Canada's central bank will likely focus its attention on stimulating the economy and steering us away from a recession. Additional rate cuts may be on the horizon as policymakers work to maintain stability. The housing market, while it may see a temporary slowdown in activity, remains largely insulated from trade disputes, ensuring its resilience in the long term."
Doug Porter, chief economist with the Bank of Montreal, said a key point from the central bank was that monetary policy cannot offset the impacts of a trade war but can try to ensure higher prices do not lead to ongoing inflation.
"Looking ahead, future decisions will be largely guided by the direction of travel in the trade war, although we suspect the bank was headed a bit lower in any event. We continue to expect three more 25 basis point cuts at the next three meetings, taking the overnight rate down to 2%. Clearly, that's dependent on how tariffs evolve, while the eventual fiscal response could have an impact as well. Our core assumption is that Canada will be facing some serious tariffs for an extended period of time and that the growth-dampening aspects of the trade war will ultimately outweigh the upside inflationary impact."
Marcus & Millichap said this week that lower interest rates have helped drive a rebound in sectors sensitive to borrowing costs, including a 16.7% surge in residential investment.
"The combination of surging supply, along with easing demand dynamics amid tighter immigration policies and uncertainties stemming from potential U.S. tariffs will continue to drive a broad-based rebalancing across all of Canada's major multifamily markets," said the company in a report.