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Research Brief

Canada Monetary Policy

June 2025

CAN Money

Lingering Uncertainty Maintains Cautious
Stance From Central Bank

Monetary authority wants more information on trade. The Bank of Canada held its policy rate at 2.75 per cent for the second consecutive month – a move that was widely expected from both swap markets and economists. Similar to the last announcement, uncertainties surrounding fluid trade policy stemming from the United States remain high. Because these risks are potentially inflationary, the monetary authority wants more clarity before making its next move. At the same time, economic growth in the first quarter came in slightly stronger than expected. While much of this was due to tariff front-loading, household consumption was also resilient. The Bank’s preferred measures of core inflation, along with other metrics of underlying price pressures, moved up as well. As uncertainties are still high and the Canadian economy did not weaken sharply, the central bank decided to hold the policy rate in order to see how the coming month unfolds. 

Further rate cuts are justified. Although a rate pause was widely expected, there are mounting pressures beginning to form within Canada’s economy that could have supported a June cut. A contraction in first quarter domestic demand, as well as a sharp fall in consumer confidence, is likely to keep domestic spending weak through the second quarter. Additionally, Canada’s housing market has been sluggish to begin the year, and the labour market has slowed significantly – particularly in trade-intensive sectors – with the unemployment rate now at 6.9 per cent. Canada’s economy is likely to be considerably weaker in the second quarter. As such, money markets and economists are still pencilling in at least two more rate cuts by year-end.

Commercial Real Estate Outlook

Higher financing costs potentially ahead. Further cuts to the overnight rate will offer 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. Regarding property sales, however, the cost of borrowing is priced around longer-term money, such as the five- and ten-year bond yield. As tariffs are inflationary, and considering the prospect of larger government deficits accompanying tariff-related bailouts, some of Canada’s major banks are forecasting rising bond yields over the coming years. Even if tariffs are removed, the associated economic boost would suggest higher yields on the longer end of the curve. As such, further cuts to the policy rate may not have much impact on borrowing costs. With that in mind, current financing levels could present an opportunity for investors to reenter the market

Investment recovery stalls in first quarter. Commercial real estate investment sales began trending up last year in June as borrowing cost fell and the economy picked up momentum. Tariff uncertainties, however, drastically curbed this trajectory. The number of sales fell 21 per cent in the first quarter of this year when compared with the final three months of 2024. Looking ahead, a gradual recovery in transactions could still materialize. Financing costs are largely set to stabilize in the short term, alongside recent price recalibration and trade headwinds potentially easing. Investors are likely to target more stable assets like multifamily or essential-based retail. 


 

* Rate forecasts an average from TD, RBC, BMO, and Scotiabank; ** Through 1Q
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Capital Economics; CoStar
Group, Inc.; Statistics Canada

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