Canada’s core Consumer Price Index (CPI) rose 2.6% year over year in January. That was down from 2.8% in the prior reading.
This 0.2 percentage point decline shows core prices are rising more slowly than before. Core inflation excludes some volatile items.
Implications For Bank Of Canada Policy
This morning’s drop in core inflation to 2.6% is an important signal. It suggests the Bank of Canada’s restrictive policy through 2025 is working, and possibly faster than many expected. It also brings forward the timing for a potential interest rate cut.
Based on this data, we should expect a more dovish tone from the Bank of Canada at its next meeting. CORRA futures are now pricing in more than a 70% chance of a 25 basis point cut by the April meeting, up from about 40% last week. We should consider positioning in derivatives that benefit from lower short-term rates, such as buying call options on three-month CORRA futures.
The Canadian dollar may weaken as rate-cut expectations strengthen. This would widen the policy gap with the U.S. Federal Reserve, where inflation remains somewhat more persistent. We should consider buying USD/CAD call options with expirations over the next two to three months to capture this move. This view is also supported by soft Q4 2025 GDP data showing the Canadian economy has stalled.
We saw a similar pattern in the second half of 2025. Employment started to cool after a long period of strength. That was the first major sign of stress and helped push the BoC to pause its hiking cycle. This sharper drop in core CPI looks like the second, and more meaningful, sign that a policy pivot could be close.
Volatility And Positioning Opportunities
The initial market reaction may trigger a jump in implied volatility. Still, the policy path for the BoC now looks clearer. Over the next few weeks, volatility could fall as markets converge around a spring rate cut. That may create an opportunity to sell volatility in longer-dated Canadian interest rate options, based on the view that the new dovish direction is now established.
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