Brexit impact will be felt in 7-8 months: Banque Internationale

The Bank of England is expected to lower rates in a meeting scheduled later today. Hans Goetti of Banque Internationale believes that while there is a possibility of lower rates, falling pound has already done the job. While Brexit is no more front-page news anymore, it still has consequences, which may be felt 7-8 months down the line as downside risks persists, he told CNBC-TV18. Equities in global markets are rallying because of hold on fiscal and monetary stimulus from central banks. Negative rates, Goetti says, can be harmful in long-term.He expects the rally to continue for another 2-3 months.Below is the transcript of Hans Goetti’s interview with Ekta Batra on CNBC-TV18.Q: Your sense on whether the Bank of England is going to cut rates today by around 25 basis points (bps) to further record lows?A: It looks likely, although it is not a done deal just yet. The probability is 80 percent according to the markets because Governor Mark Carney, in the past, has talked about hiking rates. This will be a 180 degree turn and you should also remember that the weakness in the pound has done a part of the Bank of England’s job already.Q: How much further do you expect in terms of a depreciation for the pound? It seems to have stabilised at around 1.30-1.31 to the dollar especially with Theresa May now coming in as Prime Minister. Does that change the equation at all?A: There is still some further downside risk. You have to remember one thing. Brexit is no longer page one news, but it is still prevalent in the system. You can go back to 1997, during the Asia crisis, you had a political decision at that time to devalue to baht, it took about a year for the full impact to be felt in global markets. Similar thing could happen here. While you have Brexit, now the worst is over for now, but in consequences, intended or unintended, will probably haunt financial markets and we could see the full impact only in about 6-7 months from now. So, the story is not over by any means.Q: So, do you think that the markets have run ahead of themselves because we saw German paper also being sold at a negative yield for the first time. So, are we missing something in terms of equities at least?A: Equities are rallying simply because of hope for more stimulus by Central Banks and not only monetary, but fiscal stimulus as well and then of course, you have expectations in the United States, and maybe the earnings recession is over, but the reason why we have this risk on trade right now, is expectations of further easing and negative interest rates in the long run will be detrimental to any economy. It is deflationary and I honestly do not know how western central banks are ever getting out of that, but for now, markets are celebrating and they will just see more stimulus coming and we think that this rally could last another 1-2 months.Q: So, do you expect further easing from Central Banks? We have heard from Japan, we are possibly going to hear from Bank of England today.A: The Bank of Japan will do more and again, fiscal stimulus in the pipeline there as well. In Japan the question has been will there be helicopter money, meaning you do fiscal spending, which is financed by the central bank. Again, this is something the market was anticipating rallying ahead of it, but that at the moment seems unlikely. It is more like a traditional spending package or fiscal package, which is financed by bonds by the Central Bank.