Investing.com -- The Bank of Canada maintained its target for the overnight rate at 2.25% on Wednesday, opting for stability as geopolitical tensions and trade uncertainties cloud the global outlook. Governing Council members decided to look through the immediate inflationary impact of the conflict in the Middle East while monitoring shifting U.S. trade policies.

The central bank noted that while global energy prices have surged, the Canadian economy is expected to grow by 1.2% in 2026. "Canada is being buffeted by global events and geopolitical uncertainties, but our economy is growing and is expected to continue to grow," Governor Tiff Macklem said during his opening remarks.

Higher gasoline prices pushed CPI inflation to 2.4% in March, and the Bank warns that the headline figure could reach 3% in April. Despite this spike, policymakers observed that core inflation remains steady just above 2%, suggesting that energy costs have not yet bled into broader goods and services.

The Bank’s forecast assumes that oil prices will gradually decline to US$75 per barrel by mid-2027, allowing inflation to return to the 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 noted.

Domestic growth is currently supported by consumer and government spending, even as U.S. tariffs weigh heavily on business investment and exports. The labor market remains soft, with an unemployment rate hovering between 6.5% and 7% amid a period of subdued hiring and fewer job seekers.

Looking ahead, the Bank signaled that it may need to be "nimble" if trade restrictions intensify or if energy prices remain elevated for an extended period. Macklem emphasized the Bank’s stance on future adjustments, stating, "as the outlook evolves, we stand ready to respond as needed."

Growth is projected to accelerate to 1.6% in 2027 and 1.7% in 2028 as the economy gradually absorbs excess supply. This trajectory depends on the resolution of trade negotiations and the duration of the war in Iran, which continues to drive market volatility.

Financial conditions remain sensitive to daily developments in the Middle East, though equity markets have recovered from their initial war-related losses. The Bank of Canada will next announce its overnight rate target on June 10, 2026, as it continues to navigate this period of global upheaval.