Bank of Canada Lowers Key Interest Rate to 2.5%
The Bank of Canada reduced its overnight lending rate by 25 basis points to 2.5% on Wednesday, marking the first reduction since March.
The U.S. Federal Reserve also cuts its prime rate by 25 bps on Wednesday.
The BoC’s widely expected cut came after three straight holds as BoC Governor Tiff Macklem expressed confidence that core inflation is under sufficient control. The cut was highly sought after by commercial real estate executives, who believe that it will help spur investment going forward.
“Considerable uncertainty remains,” said Macklem during a news conference in Ottawa. “But with a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks going forward.”
The reduction resulted even though Canada’s economy is being affected by both U.S. tariffs and the unpredictability of American trade policy. Macklem said tariffs are having a “profound effect” on the auto, steel and aluminum industries, among other sectors. And, Chinese tariffs on canola, pork and seafood, new U.S. levels on copper, and higher American tariffs on Canadian softwood lumber will spread the direct impacts further.
But Macklem said recent data suggest that upward pressure on underlying pressures have diminished.
“The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the United States will mean less upward pressure on the prices of these goods going forward,” he said.
The BofC is also wary of higher unemployment, which now stands at 7.1% and economic uncertainty. Many businesses have told the BoC that they have put investment plans on hold due to elevated uncertainty about U.S. trade policy. Businesses are also concerned that demand in Canada will weaken as the economic fallout broadens.
Mark Fieder, head of Avison Young’s Canadian business, said the cut is “most welcome” for the company’s clients and the entire CRE industry.
“Given the economic unpredictability we’ve all been weathering over recent months, this will provide relief and forward momentum for those investors who’ve been hesitant about kick-starting deals,” said Fieder.
He expects investment to increase, particularly in underperforming asset classes like office. Well-performing sectors, including multi-family and industrial, will continue to achieve growth, he predicted.
“We will keep a close eye there, as well as on retail, particularly in the hottest area of grocery-anchored [retail],” said Fieder.
Meanwhile, Avison Young Chair and CEO Mark Rose said the Fed’s cut delivers a critical confidence boost to the industry, signalling a positive shift in U.S. market sentiment and supporting its ongoing recovery cycle.
“While a 25-basis-point reduction may not materially transform the landscape overnight, it meaningfully improves investor psychology, underwriting conditions, and the cost of capital – key ingredients for renewed momentum,” said Rose. “These cuts are part of a broader set of building blocks necessary to restore liquidity, enhance debt availability, and stimulate investment activity across asset classes.”
Rose expects office assets, particularly class A and B properties that have experienced significant value adjustments, to see the biggest activity increase.
“Lower interest rates improve the economics of both development and acquisition, unlocking pathways to capital and encouraging occupiers and investors alike,” he said. “As expectations build for additional cuts totalling up to a full percentage point, the industry is poised to accelerate its recovery from trough to peak.”
Rose warned that the Fed’s rate reduction is “not a magic fix.” But, he added, it is a “vital step forward” that reinforces fundamentals, strengthens financial viability, and restores restores the confidence necessary for more deals to occur.
The Fed cut its benchmark federal funds target rate to 4% to 4.5% in a widely anticipated move.
Pictured: Bank of Canada Governor Mark Carney
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