BoE may opt for QE; not likely to see ECB action: Citi

All eyes are on the European Central Bank (ECB) meet today at Frankfurt against the backdrop of political volatility in Italy. Jurgen Michels of Citi feels there may not be any further measures from the ECB but the Bank of England (BoE) may announce another round of quantitative easing (QE).

Michels further added that he is looking forward to a repo rate cut in April and there may be further easing in the second half of the year, with a rate cut of around 25 basis points. Also read: World shares, euro pause ahead of ECB decision
Meanwhile, US equities have seen a good move and Michels believes comments from the ECB and the Federal Reserve chairman have propelled it to a certain extent. Moreover, global liquidity has proved to be positive for the market.  Here is the edited transcript of the interview on CNBC-TV18. Q: What are you expecting from the European Central Bank (ECB) and the Bank of England (BoE) today? Is the market really expecting them to say much at all?
A: Maybe starting with the BoE at the beginning, I think there is a decent chance that they may announce another round of quantitative easing (QE). We expect around 25 billion per quarter. However, after the Purchasing Managers’ Index (PMI) readings, which were reported earlier this week, it is not certain that they will come up with additional action. But, if it is not likely to happen this month they will probably come up with it later.
On the ECB side, we think there is no action today. So, the interest rates are likely to be unchanged and the ECB is unlikely to announce further “non-standard measures”. However, we think the tone of the press statement will go in the direction that future rate cuts are possible and a part of that kind of explanation is likely to come from downward revision of the staff projections which are likely to show the growth this year. The next year is likely to be weaker than they expected earlier and on the inflation expectations, the projections are likely to come down. Therefore, that in the end gives room for further rate cuts. Q: If he does flag off a rate cut down the year, what should we expect, could it be a specific timeline or any data point that he is watching out for? Also do you expect him to mention anything on Italy and the political turmoil and whether the European Central Bank (ECB) can play again as a backstop?
A: On the first point, I think it is with a focus on downside or increasing downside risk on the inflation side as well in the future. There is a decent chance, particularly if the incoming survey data looks weak that we get the next rate cut where only the repo rate will go down in April and then further down the year, at some stage in the second half of the year we think that it will be another 25 bps cut in the repo rate to 0.25. At that stage there is a decent chance that deposit rate will go to negative territory, to something like -0.25. So, in that respect, April and at a later stage this year I expect a rate cut.
On Italy, he will try to play down any specific comments. They will make clear that if a country gets into trouble, the ECB's outright monetary transactions (OMT) programme is there, but he will highlight that there are conditions related to this programme. So, it requires some form of Italian government to ask for a programme from the European Stability Mechanism (ESM) and to negotiate this with the other euro area countries.
In that respect, he will make it clear that the ECB is there to act but, the ECB is not there to replace government action. Q: Just a word on the global risk-on, risk-off as well. We have seen a fairly decent move, especially in US equities. What is the sense you are getting in terms of the continuation of that trend, especially in the light of the fact that we are also seeing a good bit of strength in the dollar index, not just in euro-dollar, but dollar generally against most currencies. These two normally don’t go together. A strong dollar has normally meant risk-off, yet we are seeing US equities in particular but risk assets in general not doing too badly?
A: There are different reasons coming together. On the one hand there is still some question about how the sequester will affect the economy, but then earlier this week what was probably propelling equity markets were the comments from authorities such as Bernanke and the ECB. The Fed continues to remain pretty supportive on the liquidity side and we have to watch out what happens in countries like Japan as well.
There is a huge amount of liquidity at the global level that is likely to come through. What is positive for equity markets down the road of course is the question about who is doing what at what stage. In that respect, the strengthening of the dollar may not last that much because if you get more signs of the Fed with respect of quantitative easing, that is likely to lead some correction on the dollar side as well. Q: You would remain bullish on risk assets, what would be your top 3 to 4 asset classes?
A: I am not a strategist and that is not an appropriate answer I can give. Overall, the outlook remains kind of supportive of the risk-on scenario, but there is still risk there. I mentioned the things in the US but, my feeling is that returning back to Europe, investors at the moment are too ignorant in what is going on in the case of Italy.
We may have a situation there whereby we will not have a government for a long time and the country may feel pressure to go ahead with any kind of reforms in the next couple of years and this at the moment is partly ignored. So, there are downside risks but, we have repeatedly seen that central banks are there to come in.