Canada’s Bank of Canada core consumer price index rose 0.2% month on month in January. This followed a -0.4% reading in the previous month.
The change marks a move from a monthly fall to a monthly rise. The latest figure is 0.6 percentage points higher than the prior value.
Inflation Reversal And Rate Cut Odds
The recent inflation data shows a sharp reversal, with core prices rising 0.2% in January after falling 0.4% in December 2025. This surprise jump suggests that underlying price pressures are not fading as quickly as we had anticipated. This makes a near-term interest rate cut from the Bank of Canada much less likely.
We are seeing this supported by other recent data, as Canada’s economy added 45,000 jobs last month, crushing expectations for a 15,000 gain. With year-over-year core inflation still holding firm at 2.6%, the central bank has little reason to ease monetary policy. This strong economic picture gives them room to wait and see if inflation will return to its 2% target.
For derivatives traders, this means that positions betting on aggressive rate cuts need to be unwound quickly. We are seeing the Overnight Index Swaps market adjust in real-time, now pricing in only a 20% chance of a rate cut by the April meeting. This is a dramatic change from the 60% probability we saw priced in just a few weeks ago.
This is a stark contrast to the sentiment we held in late 2025, when the consensus was building for multiple rate cuts throughout this year. The deflationary dip in December appears to have been a temporary event rather than the start of a new trend. We must now adjust our rate path expectations to a “higher for longer” scenario from the Bank of Canada.
Positioning For A Higher For Longer BoC
Therefore, we are looking at options strategies that benefit from a stable or strengthening Canadian dollar, particularly against currencies with central banks that are still expected to cut rates. Buying call options on the CAD/USD pair or selling out-of-the-money puts could be a prudent way to position for this shift. Implied volatility on interest rate futures is also likely to rise ahead of the next Bank of Canada meeting in March.
