Canada’s CPI rose 2.3% year over year in January, down 0.1 percentage points. Prices were flat on the month. Markets expected 2.4%, and TD Securities forecast 2.5%.
Food prices rose due to base effects from last year’s HST pause. That was partly offset by lower energy prices and slower shelter inflation.
Core Inflation Momentum Slows
Core CPI-trim and CPI-median both fell 0.2 percentage points to 2.45% year over year. Three-month core inflation dropped to 1.2%.
TD Securities said the Bank of Canada is unlikely to react sharply to the softer core trend. It added that weaker core momentum makes it easier for the Bank to respond if new growth headwinds appear in 2026.
Canadian fixed income outperformed after the CPI came in below expectations. The Canada–US 10-year spread narrowed by about 2 basis points. TD Securities said further downside rate risks are already fully priced.
The softer January CPI print (2.3%) shifts our focus. It suggests disinflation is building. The Bank of Canada may not cut rates right away, but this report lowers the bar for action if the economy weakens further. For traders, the bias in Canadian rates is now more clearly to the downside.
Market Implications For Rates
This CPI report adds to other signs that the economy is cooling. GDP growth in Q4 2025 was a weak 0.6% annualized. The latest labour force survey also shows unemployment edging up to 6.2%. Together, these trends strengthen the case for the BoC to begin an easing cycle. Markets are now pricing in at least 75 basis points of cuts by the end of the year.
This setup echoes past BoC pivots, such as the 2015 cuts after the oil-price collapse. After aggressive rate hikes in 2023 and 2024, the Bank has room to lower borrowing costs. The next GDP and jobs reports will be key for confirming whether growth is slowing further.
In the weeks ahead, derivatives traders may consider trades that benefit from falling Canadian rates. Examples include buying call options on BAX futures or using interest rate swaps to receive fixed, based on the view that rates will fall more than the market expects. These trades assume that incoming data will push the BoC to act sooner rather than later.
This view also points to potential weakness in the Canadian dollar, especially if the US Federal Reserve stays on hold. Positioning for a higher USD/CAD—via futures or call options—fits this outlook. A gap in economic momentum between Canada and the U.S. would support that trade.
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