Canadian Inflation Cooled in January
February 23, 2026
Last Friday, Statistics Canada confirmed that our annualized GDP contracted by 0.2% in Q4, after rising by 0.6% in Q3.
That is quite a reversal.
On a quarter-over-quarter it decreased by 0.6% (annualized).
The latest GDP data confirmed that our economy finished 2025 with less momentum than was expected.
That QoQ decrease was worse than the consensus forecast of -0.2%, and, more importantly, well short of the Bank of Canada’s latest forecast that our GDP would remain flat in Q4.
Here is why the disappointing GDP data are notable to anyone keeping an eye on mortgage rates.
When the BoC enacted its final 0.25% rate cut of 2025 in October, it signaled that it would pause thereafter and adopt a wait-and-see approach. True to its word, the Bank held its policy rate steady at its December and January policy-rate meetings.
Over that period, BoC Governor Macklem repeatedly emphasized that it would take “an accumulation of evidence” to confirm that our economy is evolving on a materially different trajectory than the Bank’s baseline forecast.
Fast forward to today.
In addition to our weaker-than-expected GDP results in Q4, Stats Can is now estimates that our GDP came in flat in January (casting doubt on the BoC’s forecast that it will increase by 0.6% QoQ in Q1).
Meanwhile, our inflation data have also come in below the BoC’s forecasts thus far in 2026, and the Bank continues to assess our labour market conditions as “soft”.
I’m not sure how much evidence the BoC will need to accumulate before it decides that our economic trajectory has deviated from its baseline forecast. But, in my view, the key data already point convincingly to an economic trajectory that is weaker than the Bank’s baseline forecast.
That bolsters my belief that there are more BoC rate cuts in store.
The Latest on Mortgage Rates
Government of Canada bond yields continued to decline last week as bond-market investors continued to price in softer economic and inflation signals.
Bond yields may be under additional downward pressure this week as demand for safe-haven assets surges in response to the war now raging in the Middle East.
Lenders continued to lower their fixed rates as it has become increasingly clear that bond yields have settled into a new, lower range.
Variable-rate discounts were unchanged last week.
I expect the BoC to reduce its policy rate to a stimulative level of 2%, or less, as it has done over its five previous rate-cut cycles. (It currently stands at 2.25%.)
Furthermore, the longer the Bank waits to reduce its policy rate further, the more I think it will then have to cut (to course correct).
My Take on Today’s Mortgage Options
My advice is the same as last week.
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 – although with less conviction of late.)
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
Home buyers who want to sell one property and buy another may not be able to line up their closing dates on the same day.
In such cases, in addition to their new mortgage, they will need bridge financing to cover the gap between their buy and sell dates.
That does make the transaction a little more complicated, but in the right hands, it can be easily handled.
This post provides a detailed explanation of how bridge financing works, and this bridge-loan calculator shows how much can be bridged in a given scenario, and at what cost.
Three Posts Every New Visitor to My Blog Should Read
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.)
