The loonie weakened against its US counterpart on Tuesday despite Canada reporting a lower-than-expected inflation reading. The Canadian dollar has slumped considerably against the greenback so far this year because investors have been bullish on the buck amid the Federal Reserve, keeping interest rates higher for longer.

According to Statistics Canada, the annual inflation rate eased to 2.8% in February, down from 2.9% in January. This was also below the consensus estimate of 3.1%. On a monthly basis, the consumer price index (CPI) rose 0.3%.

Core inflation, which omits the volatile energy and food sectors, slowed to 2.1% year-over-year, down from 2.4%.

Gasoline, mortgage interest costs, and gasoline were the main drivers of inflation last month.

“This is the second month in a row in which inflation has looked softer than expected, and with ample evidence that higher interest rates are working to tame inflation, the Bank of Canada is on track to start cutting interest rates in June,” wrote Katherine Judge, a director at senior economist and CIBC Capital Markets, in a research note.

As a result of the better-than-expected data, market analysts believe that the Bank of Canada could start discussing rate cuts as early as next month and then pull the trigger on a rate reduction in June.

“This is an unambiguously good report from the Bank of Canada’s perspective. It essentially shows that high interest rates are working to tame inflation, which is what they’re looking for to start cutting interest rates,” said Judge told CTV News in an interview.

The futures market is beginning to price in rate cuts as the Canadian government bond market saw yields fall. The benchmark five- and ten-year yields declined around 10 basis points to 3.58% and 3.53%, respectively.

The USD/CAD currency pair rose 0.33% to 1.3579, from an opening of 1.3533. The loonie has slumped 2.5% year-to-date against the US dollar. The EUR/CAD jumped 0.19% to 1.4744, from an opening of 1.4716.