Canada’s January CPI rose 2.3% year on year, down 0.1 percentage points, while monthly prices were unchanged. Market expectations were 2.4% and TD Securities forecast 2.5%.
Food prices increased due to base effects linked to last year’s HST pause. This was offset by weaker energy prices and continued cooling in shelter costs.
Core Inflation Momentum Slows
Core CPI-trim and CPI-median slowed by 0.2 percentage points to 2.45% year on year. Three-month core inflation dropped to 1.2%.
TD Securities said the Bank of Canada is unlikely to react strongly to the softer core trend. It added that weaker core momentum lowers the bar for a policy response if new growth headwinds emerge in 2026.
Canadian fixed income performed better after the CPI miss. The Canada–US 10-year spread narrowed by about 2 basis points, and TD Securities said further downside rate risks are fully priced.
The softer-than-expected January CPI reading of 2.3% has shifted our focus, confirming that disinflationary pressures are building. While the Bank of Canada is unlikely to cut rates immediately, this data lowers the bar for them to act if we see any more economic weakness. For traders, this means the bias for Canadian interest rates is now firmly to the downside.
Market Implications For Rates
This CPI report builds on other recent signs of a cooling economy, such as the sluggish 0.6% annualized GDP growth we saw in the final quarter of 2025. Coupled with the latest labour force survey showing the unemployment rate has crept up to 6.2%, the case for the BoC to begin an easing cycle is getting stronger. The market is now pricing in at least 75 basis points of cuts by the end of this year.
Looking back, this setup is similar to previous cycles where the BoC was forced to pivot, like the rate cuts in 2015 that followed a collapse in oil prices. After the aggressive series of rate hikes throughout 2023 and 2024, the Bank has significant room to lower borrowing costs. Any upcoming data, particularly the next GDP or jobs report, will be watched closely for signs of further deceleration.
In the coming weeks, derivatives traders should consider strategies that profit from falling Canadian interest rates. This includes buying call options on BAX futures or entering interest rate swaps to receive the fixed rate, betting that rates will fall more than the market currently expects. These positions are essentially a wager that upcoming economic data will force the BoC’s hand sooner rather than later.
This outlook also implies weakness for the Canadian dollar, especially if the US Federal Reserve remains on hold. We believe that positioning for a higher USD/CAD exchange rate through futures or call options is a logical extension of this view. The divergence in economic momentum between Canada and the U.S. supports this currency trade.
