The Bank of Canada left its target for the overnight rate unchanged at 2.25% on Wednesday, opting for a steady policy stance amid heightened geopolitical tensions in the Middle East and uncertainty around U.S. trade measures. Governing Council members said they would look through the immediate inflationary effects of the conflict while continuing to track evolving trade developments.
In opening remarks, Governor Tiff Macklem framed the decision within the context of global shocks and domestic resilience. "Canada is being buffeted by global events and geopolitical uncertainties, but our economy is growing and is expected to continue to grow," he said.
The central bank highlighted the recent increase in energy prices as a key driver of headline inflation. Higher gasoline costs pushed consumer price inflation to 2.4% in March, and the Bank warned that the headline rate could climb to 3% in April. Despite that rise, policymakers observed that core inflation measures have remained steady, sitting just above 2%, which suggests that the energy price surge has not yet broadly transmitted into underlying goods and services prices.
Looking at the outlook for inflation and oil, the Bank’s baseline projection assumes that oil prices will ease to US$75 per barrel by mid-2027. Under that path, the Bank expects inflation to revert to its 2% target early next year. "Monetary policy is focused on ensuring the jump in energy prices does not turn into persistent inflation, while helping the economy adjust to global headwinds," Macklem added.
On the growth side, the Bank expects real GDP to expand by 1.2% in 2026. Domestic demand is currently supported by consumer spending and government outlays, even as U.S. tariffs are exerting a drag on business investment and exports. The Bank projects that growth will accelerate to 1.6% in 2027 and to 1.7% in 2028 as the economy absorbs excess supply.
The labour market is described by the Bank as softening. Unemployment is reported to be in a range between 6.5% and 7%, amid a period of subdued hiring and fewer job seekers. Those conditions factor into the Bank’s assessment of slack in the economy and its medium-term inflation outlook.
Policymakers signalled readiness to react if conditions warrant changes. The Bank said it may need to remain "nimble" if trade restrictions intensify or if energy prices prove persistently elevated. Macklem reiterated that "as the outlook evolves, we stand ready to respond as needed."
Financial conditions have shown sensitivity to daily developments in the Middle East, though equity markets have retraced much of their initial war-related losses. The trajectory of growth and inflation in the Bank’s projection is explicitly tied to external factors, including the resolution of trade negotiations and the duration of the war in Iran, which the Bank says continues to be a source of market volatility.
The Bank of Canada will next announce its target for the overnight rate on June 10, 2026, as it manages policy through a period marked by global uncertainty and domestic adjustment.
Contextual note: The Bank’s decision balances an immediate energy-driven rise in headline inflation against stable core inflation readings and a labour market showing signs of softness. Projections for growth and inflation assume a gradual easing in oil prices and depend on external political and trade developments.