Canada’s Bank of Canada core consumer price index rose 0.2% month over month in January. This follows a -0.4% reading the month before.
This shift marks a move from a monthly decline to a monthly increase. The latest figure is 0.6 percentage points higher than the prior value.
Inflation Reversal And Rate Cut Odds
The latest inflation data shows a clear reversal. Core prices rose 0.2% in January after falling 0.4% in December 2025. This unexpected increase suggests that underlying inflation is not cooling as fast as expected. As a result, a near-term interest rate cut from the Bank of Canada now looks less likely.
Other data supports this view. Canada’s economy added 45,000 jobs last month, far above forecasts for a 15,000 gain. With year-over-year core inflation still steady at 2.6%, the central bank has little pressure to ease policy. Strong growth also gives it room to wait and see whether inflation moves back to the 2% target.
For derivatives traders, this means trades based on large, rapid rate cuts may need to be reduced or closed. The Overnight Index Swaps market is already adjusting, with only a 20% chance of a cut priced in for the April meeting. That is a big drop from the 60% probability priced in just a few weeks ago.
This also differs from late 2025, when markets expected several rate cuts this year. The December drop now looks more like a one-off than the start of a new trend. Expectations may need to shift toward a “higher for longer” outlook from the Bank of Canada.
Positioning For A Higher For Longer BoC
We are therefore looking at options strategies that could benefit from a steady or stronger Canadian dollar, especially versus currencies where central banks are still expected to cut rates. One approach is buying call options on the CAD/USD pair or selling out-of-the-money puts. Implied volatility in interest rate futures may also rise ahead of the next Bank of Canada meeting in March.
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