Easier monetary policy in the cards for both Canada and the United States this year as growth falters and downside risks emerge, economists say.
In a research note, BofA Merrill Lynch is continuing to predict the next move from the Bank of Canada will be a cut in policy rates. Merrill notes that the recent softening in inflation “opens a window for easing monetary policy… that did not exist before.”
While slightly better U.S. economic news may keep the Bank on hold for the next few policy meetings, Merrill ultimately sees a further cut, “with the timing to be driven by the evolution of the U.S. and Europe sovereign debt situations — both of which have a high probability of deteriorating further in the months ahead.”
Meanwhile, for the U.S., Scotia Economics says a case can be made for the U.S. Federal Reserve Board embarking on another asset expansion program, after it experiments with published rate forecasts at the Jan. 25 FOMC meeting. It expects the Fed to initiate another round of asset purchases by about mid year, once growth and inflation show signs of waning.
It also believes that there is a bias to easing at the Fed, and that Fed officials also view it as easily reversible if necessary, which may make them willing to err on the side of additional stimulus.
If yet another round of quantitative easing is adopted, “That, in turn, would be more conducive toward a view that sees the Fed funds target rising by no earlier than market pricing and perhaps beyond mid-2014,” Scotia says.