Canadian Inflation Cooled in January

 Last Tuesday Statistics Canada confirmed that our Consumer Price Index (CPI) cooled to 2.3% in January on a year-over-year basis, down from 2.4% in December.

That result keeps our CPI a little above the Bank of Canada’s (BoC) 2% target, but that is primarily because of base effects tied to the federal government’s GST/HST holiday, which ran from mid-December 2024 to mid-February 2025. (Our CPI would have been 2.1% with the GST/HST holiday stripped out.)

Shelter-cost inflation continued to cool in January. It increased by only 1.7% year-over-year, and Stats Can noted that this was the first time in nearly five years that year-over-year shelter price growth has fallen below 2.0%.

That deceleration was driven by slower growth in rent and mortgage-interest costs, which are expected to continue to exert downward pressure going forward (as I outlined in this recent post).

Shorter-term measures of inflation confirmed still more price cooling. The BoC’s two most closely watched gauges of core inflation (CPI-Median and CPI-Trim) have fallen well below the Bank’s 2% target when measured over the past 90 days.

Our decelerating inflation gives the BoC additional flexibility to enact additional rate cuts if needed (and is a reminder that the BoC monitors the risks associated with below-target inflation as closely as it monitors the risks around above-target inflation.)

The Latest on Mortgage Rates

Government of Canada (GoC) bond yields have fallen steadily of late alongside their US Treasury equivalents, as bond-market investors in both countries price in softer economic and inflation signals.

Lenders have responded thus far with small reductions to their fixed mortgage rates.

Variable-rate mortgage discounts off lender prime rates have also widened a little recently.

I expect the BoC to reduce its policy rate further from here.

It currently stands at 2.25%, which the Bank considers to be the bottom end of its neutral-rate range. (The neutral range is the level where the policy rate is neither restricting demand nor stimulating it).

I believe the Bank will reduce its policy rate to a stimulative level of 2%, or less, as it has done over its five previous rate-cut cycles. Furthermore, the longer the Bank waits to reduce its policy rate to a stimulative level, the more I think it will have to cut (to course correct).

My Take on Today’s Mortgage Options

Fixed rates are currently offered at about their long-term average levels, and three- and five-year fixed rates remain the most popular choices. If the spread between those two options is minimal, I think five-year fixed rates offer slightly better value.

While I certainly understand the appeal that fixed-rate stability offers in today’s increasingly uncertain environment, I continue to believe that today’s variable mortgage rates have the best chance of producing the lowest borrowing cost over their full terms.

(Fair warning: This view is based in part on my belief that there are more BoC rate cuts in store this cycle, which is still a contrarian call. Bond market investors continue to believe that the Bank’s next eventual move will be a hike.)

Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments).

Insider’s Tip for Borrowers

Do you have an existing mortgage that will be up for renewal soon? If so, have you passed your lender’s laziness test? Spoiler alert: many don’t pass and it costs them. Forewarned is forearmed.

Three Posts Every New Visitor to My Blog Should Read

1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?

This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.

For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.

This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)

David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.

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