The Bank of Canada (BoC) opted to maintain its benchmark interest rate at 2.75% on June 4.
The Bank cited stronger-than-expected economic growth in the first quarter and persistently elevated inflation. Canada’s GDP grew at an annualized rate of 2.2% in Q1, possibly due to pre-tariff stockpiling rather than sustainable growth, raising concerns about a potential slowdown in upcoming quarters. The threat of tariffs continues as well; the Trump Administration has recently announced the doubling of steel and aluminum tariffs from 25% to 50%.
Earlier in May, market sentiment had placed the odds of a 25bps reduction in June quite high, but these macroeconomic results have put the Bank in a complicated position. The BoC states in its latest update, “the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations.”
Timing Monetary Policy Very Difficult
Making adjustments to the Overnight Rate is a difficult balancing act in the face of:
🔘 Higher than anticipated GDP growth, suggesting a more resilient domestic economy
🔘 Persistent core inflation figures, which increased to 2.9% in April (excluding energy)
🔘 Weak job growth (+7,400 jobs in April while unemployment rose to 6.9%)
While there were signs of a resilient economy, lower job growth and continued uncertainty in the market point to higher risks for slowing economy in the second half of the year. This divergence makes timing rate reductions difficult, as the impact of interest rate changes take time to permeate through the market. The Bank has a challenging mandate to make adjustments at the right time to stave off inflation while stimulating economic growth.
Construction Market Update
As the construction industry heads into the summer months, the number of residential and non-residential building permits has grown substantially (+33.8% between January 2025 to March 2025). Construction employment is also trending positively, growing by more than 57,000 workers from January to April.
However, residential construction continues to contract in major markets like Toronto and Vancouver. Housing starts were -52% and -25% respectively in April (YTD compared to 2024) , as investment capital in these markets appear to be sitting on the sidelines. In other markets, growth ramped up after the winter months as housing starts grew in cities such as Calgary (+30%), Saskatoon (+125%), Montreal (+82%), and Ottawa (+121%) in the same timeframe.
The industry overall has shown resilience, with a growing labour pool supporting more jobs and sustained growth across most sectors. However, the residential markets in Vancouver and Toronto have shifted dynamics as investment capital takes a more cautious stance. While population growth has continued to decelerate, demand for housing, education, healthcare, and other infrastructure remains high across the country. Connect with a member of our team to learn more about navigating your project through these rapidly changing times.
