(Bloomberg) — The Bank of Canada cut interest rates by a quarter of a percentage point, making it the first Group of Seven central bank to kick off an easing cycle.

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Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 4.75% on Wednesday, as widely expected by markets and economists in a Bloomberg survey. Officials say they’re more confident that inflation is headed to the 2% target, and said it’s “reasonable to expect further cuts,” if progress continues.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Macklem said in prepared remarks.

Bonds rallied after the cut, and yields on the government of Canada 2-year note fell 5.9 basis points as of 10:10 a.m. Ottawa time. The loonie depreciated to C$1.3729 per US dollar.

The bank indicated the easing path is dependent on continued inflation progress, which policymakers say is “likely to be uneven.” Officials flagged global tensions, a faster-than-expected rise in home prices and high wage growth relative to productivity as potential risks to the outlook.

“We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,” Macklem said.

The Bank of Canada’s first rate cut since 2020 shows officials are increasingly confident they’re getting closer to declaring victory over inflation, which has fallen to a yearly pace of 2.7% after peaking in mid- 2022. That allows policymakers to start normalizing interest rates after one of the most aggressive hiking cycles in the history of the central bank.

“It’s taken only 11 months for the central bank to go from hikes to cuts, but this cycle is very different. Indeed, the policy rate reached much more restrictive levels this time around than anything seen in recent decades,” Royce Mendes, managing director at Desjardins Securities, said in a report to investors.

“Rather than waiting for a recession to take hold, officials are acting pre-emptively to guide the economy toward a soft landing. With challenges on the horizon and monetary policy only working with a lag, today’s 25 basis point rate reduction is consistent with a risk-management approach.”

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The bank’s language suggests that as long as inflation continues to moderate and remains consistent with the target, further cuts are likely, Charles St-Arnaud, chief economist at Alberta Central, said in an email.

“While the language remains cautious, it does not dismiss the possibility that the BoC could cut again in July, subject to inflation.”

Still, there’s uncertainty as to how quickly borrowing costs will fall. Alongside risks to the inflation outlook, the Bank of Canada has moved before the Federal Reserve. Historically, the countries’ interest rates have tended to take a similar path, and when they don’t, there’s some pressure on the currency. A weak loonie means higher import costs, risking higher inflation. Macklem has said there are limits to how much his central bank can diverge from its US counterpart.

The Bank of Canada’s decision to cut comes a day before the European Central Bank is widely expected to lower borrowing costs, making the northern nation the first in the G-7 to launch into an easing cycle. The Canadian central bank joined the Swiss National Bank and Sweden’s Riksbank to pivot to easier policy as inflation risks subsided.

Since the beginning of this year, inflation in Canada has decelerated faster than expected. The consumer price index slowed to 2.7% in April versus the central bank’s forecast of 2.9% for the second quarter. Underlying price pressures have also eased for four consecutive months, with an average of the two core measures reaching 2.75% in April.

Overall, policymakers see the economy in excess supply, and wage pressures moderating gradually. Still, consumption remained resilient early this year and the economy showed strong momentum heading into April, when the labor market added the most jobs in more than a year.

Between now and the July rate decision, there are two more reports for inflation as well as for jobs and retail, and the release of April gross domestic product data. Officials say they’ll continue to focus on demand and supply in the economy, inflation expectations, wage growth and corporate pricing behavior.

Macklem, along with Senior Deputy Governor Carolyn Rogers, will shed more light on the decision during a news conference at 10:30 a.m. in Ottawa.

Policymakers say they’ll continue quantitative tightening and normalize the balance sheet.

–With assistance from Jay Zhao-Murray.

(Adds market, economist reaction.)

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