ECB won't cut rates; see interest reviving in EMs: Expert

Patrick Legland of Societe Generale denies the possibility of the European Central Bank (ECB) cutting rates despite the markets expecting one. Most analysts believe the central bank will cut interest rates (currently at 0.75 percent) by 25 basis points in its meeting this week. The bank had last eased rates in July 2012.

"The market is expecting ECB to cut rates, but rates are already very low. Interbanking rates are very low and even if ECB were cutting rates it would have no impact on the economy," says Legland in an interview to CNBC-TV18.
The ECB has kept the interest rates unchanged since last year despite a consistent clamour for relaxing the monetary policy. Adding to a comforting assumption of a rate cut is the Eurozone inflation that fell to 1.7 percent in March, a level below the ECB's target.
The political and economic uncertainity in the Eurozone is making investors look towards safer emerging markets (EMs). Legland believes the interest for emerging markets, including India will revive in the second half of the year. "Obviously investors will be looking for growth and yield and emerging markets would be very important asset in this strategy," Legland says. Below is the edited transcript of Legland’s interview to CNBC-TV18.

Q: Big ticket meetings lined up by the European Central Bank (ECB) as well by the Federal Reserve. How do you see the global market momentum which has been quite good so far?
A: We do maintain a positive stance on European equities. They still remain undervalued and despite gloomy economic outlook, we consider that there is still appetite for risk and for European equities right now. Q: There seems to be a language of growth occupying a slightly larger space in the political dialogue compared to the overwhelming language of austerity. Do you think that sentiment itself will give a few more points in terms of people buying equities?
A: The worst it is for the economic situation the more investors expect political action and action from the ECB to support growth. Then, indeed, the move and the long weight has been moving from austerity to growth and to incentive to boost the economy. Q: What about this very interesting deal apparently getting struck between Germany and Spain with Germany now getting interested in perhaps resolving Spain's unemployment problems to its advantage. Is this a test of the times and will equity markets take heart from even such political deals?
A: I am not sure. This is an interesting experience, but I am not sure it would have a massive impact. We have lot of expectations. The ECB is meeting on Thursday. They were cutting interest rates from 0.75 to 0.5 percent. It would have literally no impact on the economy and only a marginal impact to weaken the euro. Is Draghi expected to will he try announce measures to boost the economy on Thursday? One incentive might be coming from the European Bank of Investment where ECB could provide some financing. This is certainly the main topic of the week and the most important thing for the next few weeks which will drive the markets. Q: What are you expecting from the ECB? In your mind do you think the ECB will go ahead and cut rates? It has been holding it at record lows way back since July 2012. Because the data has deteriorated so much do you think a rate cut is on the anvil?
A: Frankly, no. The market is expecting ECB to cut rates, but rates are already very low. Interbanking rates are very low and even if ECB were cutting rates it would have no impact on the economy. I would expect Draghi to give more details on what it could do to spur the economy, to avoid a fragmentation. ECB has so far failed to transmit its monetary policy to each region and each local market on the short-end and the long-end of the rate. It certainly was our expectation. Q: What assets will smart money chase? We have seen this movement in favour of developed market equities, notably the US equities and emerging markets were not the best of asset class preference in the first quarter of 2013. Will that continue? Or do you see any of the emerging markets taking the lead and becoming a preferred choice for smart investors?
A: In the second half of the year, we would expect interest for emerging market and also for countries like India to resume. Obviously investors will be looking for growth and yield and emerging markets would be very important asset in this strategy.