Bank of Canada pauses rates for the second consecutive time

This morning, the Bank of Canada announced its latest monetary policy decision to hold the rate at 2.75% for the second consecutive time. The last hold was in mid-April. Prior to that there were a series of seven consecutive cuts, including two reductions of 50 basis points each in October and December of last year.  

The decision today reflected a complex mix of factors. Amid a weakened labour market, there were growing calls for the Bank to cut rates and boost economic growth. However, conflicting inflation metrics in April made the choice far from simple.

“Governing council will continue to assess the timing and strength of both the downward pressure of a weaker economy and the upper pressure from higher costs,” said Governor Tiff Macklem during the morning announcement on June 4.  

“At this decision, there was a clear consensus to hold the policy rate unchanged as we gain more information,” he further noted.

For now, Macklem noted that the Bank will be “less forward looking” and appears content to wait, cautious of cutting rates too soon and risking another inflation surge. Meanwhile, the housing market continues to grapple with affordability issues, historically low sales activity, and sliding prices, complicating the outlook further for potential buyers. 

April’s murky inflation data points to underlying trouble

After last month’s pause, many banks had anticipated a cut.  However, Shelly Kaushik, senior economist and vice president of economics at the Bank of Montreal (BMO), said that their stance changed with Friday’s GDP report.

“Since then, we’ve seen unexpectedly high inflation numbers for April and solid economic indicators like GDP growth and retail sales,” Kaushik explained. This suggests the economy is performing better than expected.

At first glance, April's headline inflation rate dropped to 1.7%, dipping below the Bank of Canada’s (BoC) 2% target.  

Unfortunately, the main driver of this decline was energy prices — particularly gas — which plunged by 18.1% compared to this time last year. 

“Much of the headline ‘improvement’ is coming from lower energy prices and the removal of the carbon tax,” notes Kaushik. However, she stresses that these factors are temporary and will phase out of inflation calculations within a year.

However, when you remove energy prices, the CPI sits at 2.9%, uncomfortably close to the upper limit of the BoC’s range.  

“Ultimately, both headline and core inflation are stickier than expected; while the headline rate is below 2%, that’s due to temporary, known factors—so the Bank will be more concerned with the hot core inflation rates,” explains Kaushik.

Core inflation measures focus on stable, long-term price trends by excluding volatile items like gas and fresh produce. In April, core inflation measures, such as the CPI-trim, hit 3.15, exceeding market expectations. 

Labour market continues to tighten, specifically manufacturing

Adding to the pressure, Kaushik says that the labour market is among the weakest areas of the economy and is expected to worsen as economic growth slows. Job creation in April was minimal, with only 7,400 positions added, following large losses in March.

Key sectors reflect this trend. Goods-producing industries experienced a decline of 33,000 jobs, and manufacturing accounting for 31,000 losses, directly impacted by tariffs. Wholesale and retail trade also saw a decrease of 27,000 jobs. Meanwhile, public administration recorded a temporary boost in employment due to election-related hiring; however, these gains won’t last.

“The labour market has weakened with job loss concentrated in trade intensive sectors,” Macklem said in the announcement. “So far employment has held up in sectors less exposed to trade, but businesses have plans to scale back hiring.” 

Nationwide, unemployment climbed to 6.9%. Ontario bore the brunt of job losses, particularly in the manufacturing sector as the industry continues to face uncertainty related to tariffs on exports to the United States.

While the Bank held the overnight policy rate today, according to Kaushik, the Bank isn’t done cutting the policy rate just yet.  

“Lower rates could cushion the impact of tariffs and broader uncertainty on the job market, but we don’t believe they will be enough to stop further weakening in the coming quarters,” she says. 

Related: How to pay your mortgage after a job loss 

The housing market slows to a crawl in what should be peak season

While today’s rate hold does little to improve mortgage affordability, the housing market remains slow—even during the typically active spring season.  

If you’ve been waiting with your down payment hoping for better deals, this market might offer more buying power, thanks to increased inventory and sliding prices. The MLS Home Price Index (HPI) fell 1.2% in April and is down 3.6% compared to a year ago. The national average home price also dropped, hitting $679,866. Although, in some smaller markets like Edmonton and Regina, there’s steady growth. 

Ontario's market recorded the lowest April sales in five years. Home sales in April fell 31% below the five-year average and 30.7% below the 10-year average, signalling a strong buyer’s market despite an increase in listings. 

However, affordability remains a significant barrier. Over the past 25 years, home prices have grown by more than four times, while average disposable income has increased by just over double. This disparity is stark in provinces like Ontario and British Columbia, where average home prices surpass $859,000 and $942,000, respectively. 

James Innis of the Sutton Group explains that even buyers who can afford a home are still hesitant. He points to "uncertainty around the labour market and the tariff war with the US," as well as "the higher interest rate environment" and "the overall state of a buyer-friendly real estate market" as key reasons for this hesitation. These combined factors are likely driving historically low levels of transaction activity. 

Yet those in a position to buy due to life changes such as relocating or upsizing may find this cooling market advantageous.

Ultimately, Kaushik says, “while some buyers are benefiting from current conditions, we don’t anticipate a broader recovery in housing demand until economic uncertainty eases.”

Read more: Ask the expert: What’s your mortgage strategy in Trump’s tariff war? 

Fixed mortgage rates compound financial stress for mortgage holders  

Homeowners renewing fixed and variable-rate mortgages are feeling the pinch. Mortgage interest rates have soared compared to the historically low rates available during the pandemic, leaving many struggling to adjust to substantially higher monthly payments.  

The latest Equifax Q1 2025 report highlights a rise in mortgage delinquencies, with Ontario's 90+ day mortgage delinquency rate increasing to 0.24%, a 71.5% jump from Q1 2024. British Columbia also saw a rise of 33.3%, reaching 0.18%. These figures reflect growing financial strain, particularly in Ontario, which remains a hotspot for delinquency increases.

Unlike variable rates, fixed mortgage rates are tied to bond yields, not the Bank of Canada’s overnight rate. Recent fluctuations in bond markets have caused lenders to push fixed rates up by 10 to 15 basis points, keeping borrowing costs high despite decreasing home prices.  

Current homeowners are trying to find relief by switching lenders. According to Equifax, 28% of mortgage holders have changed lenders in Q1 of 2025, with almost half of those switches (46%) staying within the big five Canadian banks. Despite that, rising delinquency rates show that financial stress is spreading.  

Read more: Should you take a mortgage vacation? What to know about mortgage deferrals

The combination of stubborn fixed rates, persistent inflation, and the high cost of living continues to test the financial resiliency of Canadians, particularly in provinces grappling with sharp increases in delinquency rates.

Balancing the competing forces of inflation, affordability, and economic growth will remain its greatest challenge for the housing market in the months ahead. 

Last month: BoC keeps policy rate steady as US tariffs and trade war cloud economic outlook