Commercial real estate veterans have welcomed the first rate cut of 2025 by Canada's central bank, saying another reduction in the overnight lending rate should help the industry.
The Bank of Canada announced it is lowering its trend-setting policy rate by 25 basis points to 3%. Wednesday's move follows a reduction of 50 basis points in both December and October, and a total of five cuts in 2024. The overnight lending rate rose to 5% in July 2023 before the central bank started to cut it last year.
"The cumulative reduction in the policy rate since last June is substantial," the Bank of Canada said in a statement accompanying its decision. "Lower interest rates are boosting household spending and the economy is expected to strengthen gradually and inflation to stay close to target."
Doug Porter, chief economist with the Bank of Montreal, noted that economic policies the United States might enact are probably weighing heavily on Canada's central bank. The U.S. Federal Reserve was scheduled to announce a rate decision later Wednesday. The Bank of England is scheduled to decide next week whether to embark on what would be its third rate cut since August.
"It's a very, very different set of calculations confronting the Bank of Canada," said Porter, noting the overlap of rate decisions will happen five times this year, with the remaining four in the second half of the year. "While the tariff threat is of some academic interest in the U.S., it is an existential risk to Canada."
Threats by U.S. President Donald Trump to impose a 25% tariff on Canadian goods have created concern about the impact such a move could have on the Canadian central bank's decisions regarding future rate cuts.
"If these were normal times, we would be calling for the bank to stand aside," Porter said. "With the Fed on hold, the Canadian dollar on its heels, core inflation turning back up, and plenty of signs of life in domestic spending, there are reasons to take a pause."
Eyes on tariffs
Canada's central bank indicated it is keeping a close eye on potential tariffs.
"If broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested," the Bank of Canada said. "We will be following developments closely and assessing the implications for economic activity, inflation and monetary policy in Canada. The bank is committed to maintaining price stability for Canadians."
The Royal Bank of Canada noted in a report that Bank of Canada Governor Tiff Macklem already flagged the downside risks from potential protectionist U.S. trade policy as a "major new uncertainty" for the country.
"Those concerns have likely only become more pronounced with the new Trump administration threatening to impose aggressive tariffs on imports from Canada as early as next month," the Royal Bank of Canada said in its report. "We expect policymakers would be more likely to cut interest rates faster and further should those downside risks materialize with the ultimately disinflationary growth and labour market implications from tariff hikes more a concern than a one-time increase in prices."
During a news conference to discuss the rate decision, Macklem said the possibility of tariffs prevents the bank from providing normal guidance on future cuts.
"There are many uncertainties. There is a lot we don't know," he said. "We don't know what new tariffs will be imposed, when or how long they will last. We don't know the scope of retaliatory measures or what fiscal support will be provided."
Even with more information, Macklem said, it would be difficult to be precise about economic impacts.
"We have little historical experience with tariff changes of the magnitude" under consideration by the United States, he said
Industry applauds cut
Christopher Wein, chief operating officer of developer Equiton, applauded the latest rate cut.
"From a development perspective, they have an impact on our costs. We can pass on those savings to the consumers. For the construction we are building, the financing runs on variable interest rates," Wein told CoStar News. "The interest rate environment is important to us."
However, Wein said, a lower-rate environment is also important from a consumer confidence perspective. With rates starting to fall, "it helps with consumers — both investors and end-user condo purchases."
The executive added that tariffs would likely help the decision to lower rates even more. "Tariffs are deflationary, not inflationary. Short term, they might feel inflationary, but in the midterm they create deflation and slow the economy."
He added that "no one knows what to do" with the threat of tariffs from the United States because it is too difficult to predict the outcome today.
Mark Fieder, principal and president of Avison Young Canada, said the reduction is welcome news for commercial real estate investors looking to step off the sidelines and into the market.
"We continue to actively monitor economic conditions and acknowledge a degree of risk and uncertainty ahead due to the possibility of tariffs imposed on Canadian goods by the U.S.," Fieder said in a statement emailed to CoStar News. "We remain optimistic about a longer-term bull run going into the last half of the year, stimulating appetite and capital allocation in such asset classes as industrial and multifamily."
Phil Soper, chief executive of Brookfield companies Royal LePage and Bridgemarq, said if the Bank of Canada had not lowered rates then it could have taken the wind out of the residential market.
"It was widely expected," Soper told CoStar News. "People are concerned about Trump tariffs, and it would have been a real shock to the nascent recovery" for rates not to fall.
The Canadian Real Estate Association this month modified its forecast upward for the market for existing homes.
"I think normalcy is returning," Soper said, as price increases "are holding steady in the mid-single-digit range."