Canada’s Bank of Canada core Consumer Price Index (CPI) rose 2.6% year over year in January. That is down from 2.8% in the prior reading.
The 0.2 percentage point decline shows core prices are rising more slowly than before. Core inflation excludes some volatile items.
Core Inflation Signals Earlier Rate Cuts
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 may be working faster than many expected. This result brings forward the likely timing of an interest rate cut.
With this data, we should expect a more dovish tone from the Bank of Canada at its next meeting. CORRA futures now price 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 will likely weaken as expectations for rate cuts build. That would widen the policy gap with the U.S. Federal Reserve, where inflation is proving somewhat more persistent. We should consider buying USD/CAD call options with expirations over the next two to three months to benefit from this move. This view is also supported by soft Q4 2025 GDP data, which showed the Canadian economy stalling.
We saw a similar pattern in the second half of 2025. Employment started to soften after a long stretch of strength. That was the first clear sign that led the BoC to pause its hiking cycle. This drop in core CPI looks like the second—and more important—signal that a policy pivot may be close.
Volatility May Fade As Market Reprices
The initial market response may push implied volatility higher. But the path for the BoC now looks clearer. In the coming weeks, volatility could fall as the market settles on the idea of 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 more firmly in place.
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