Canada’s headline inflation rose to 2.4% year on year in March, up from 1.8% previously and slightly below expectations. Core inflation measures tracked by the Bank of Canada remained stable.
Governor Tiff Macklem said the central bank is not concerned about a temporary rise in inflation expectations. The data is expected to be neutral for next week’s Bank of Canada meeting.
Danske Research Team expects the Bank of Canada to keep its policy rate unchanged at the meeting. This aligns with current market pricing.
The article states it was produced using an Artificial Intelligence tool and reviewed by an editor.
Looking back to March of 2025, we saw Canadian headline inflation rise to 2.4% year-on-year, a print that was slightly below what the market had anticipated. The Bank of Canada’s core measures remained stable at that time, and Governor Macklem’s commentary suggested no concern over a temporary rise in expectations. The market correctly priced in a rate hold for the following meeting, viewing the data as neutral.
That period of calm stands in stark contrast to the environment we face today. The latest release from Statistics Canada for March 2026 shows headline inflation has now accelerated to 3.1%, proving the price pressures from last year were not as temporary as hoped. This persistence has forced the Bank of Canada to adopt a much more hawkish tone in its recent communications.
Given this shift, traders should now be using derivatives to position for a higher probability of a rate hike. Implied volatility on Bankers’ Acceptance futures options has ticked up, reflecting this uncertainty and a departure from last year’s predictability. We believe strategies that profit from rising short-term interest rate expectations are now warranted.
This also creates opportunities in the foreign exchange market, as the Bank of Canada’s stance has become firmer. The Canadian dollar has strengthened, recently hitting a six-month high against the US dollar, supported by oil prices that have remained above $85 a barrel. Using options to bet on continued CAD strength, particularly against currencies with more dovish central banks, is a logical response in the coming weeks.
