The Bank of Canada on Wednesday cut its key policy rate by 25 basis points to 4.75%, in a widely expected move that marked the first reduction in four years, and said more easing was possible if inflation continued to decline.
After keeping interest rates at their highest level in more than two decades at 5% for almost a year, the BoC said that indicators for core inflation are looking increasingly positive.
"With further and continued evidence that underlying inflation is declining, monetary policy no longer needs to be as tight," Governor Tiff Macklem said in his opening remarks after the announcement.
Financial markets are immediately pricing in a possible 42% cut to 4.50% next month, and a cut in September. Most economists polled by Reuters expected a rate cut on Wednesday.
The Canadian dollar pared earlier gains and fell 0.18% to 1.3702 against the U.S. dollar, or 72.98 U.S. cents. after the decision.
The BoC joined Sweden's Riksbank and the Swiss National Bank in cutting rates that have burdened households and businesses, as well as depressed economic growth amid reduced price pressures.
The European Central Bank is likely to follow suit on Thursday, according to financial market expectations.
Inflation in Canada has slowed this year to a three-year low of 2.7% in April. Although inflation has remained below 3% for four consecutive months, it is still higher than the Bank's 2% target.
"If inflation continues to decline, and our confidence that inflation is moving towards the 2% target sustainably continues to increase, it is reasonable to expect further reductions to our policy interest rate," Macklem said as an indication of how future reductions could play out.
