Jurgen Michels, economist, Citi, says that feels the possibility of a rate cut is not out completely. Significant appreciation of the euro is likely to create additional headwinds for the euro economy. With more weakness at a later stage rate cuts are likely to come through.
urgen Michels, economist, Citi, says that feels the possibility of a rate cut is not out completely. Significant appreciation of the euro is likely to create additional headwinds for the euro economy. With more weakness at a later stage rate cuts are likely to come through.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What is your view on the decision which the European Central Bank (ECB) took yesterday? Rate cuts now appear unlikely in 2013. Do you think that this is the start of a pullback of a lot of central bankers trying to unwind what they have done in 2012 or at least not take incremental steps from hereon?
A: The ECB has not changed its outlook on the economy and inflation, but they are more upbeat on the assessment of the financial situation. It is unlikely that any immediate rate cut would take place. As a reaction of the meeting yesterday we have delayed our rate cut forecast from the first quarter, what we expected earlier to the second quarter. So, a 25 basis points rate cut and we continue to expect a second rate cut in the second half of the year. However, we don’t feel that the expectation of rate cut is out completely. Draghi mentioned that there are huge amount of uncertainties and we think that the ECB will be disappointed again and they have to at in that environment.
Q: How do you see the euro movement?
A: Yesterday the exchange rate reacted on the rate cut expectations in the euro area. Significant appreciation of the euro is likely to create additional headwinds for the euro economy. With more weakness at a later stage rate cuts are likely to come through. For a near-term probability of a rate cut, there should be a substantial fall in the sentiment indicators in January and February.
In order to get back to the ECBs path of recovery there has be further improvement of sentiment indicators and lending activity by second quarter or middle of the year. If this does not take place and we just move around current readings in terms of sentiment figures, then eventually will make room for cutting rates at some stage.
Q: Yesterday Draghi's statement of a positive contagion, do you think that holds? The market is unlikely to force Spain and Italy to ask for bailout and the Outright Monetary Transactions (OMT) may not be used at all or do you see that possibility emerging over Q1 or Q2?
A: Some positive contagion things are coming through. Currently, we see at a broader stage that things have improved and if participants get more upbeat then we will continue to see self fulfilling move.
However, the underlying problems have not been taken away, the former ECB governing council member said. The economy is still weak and there are still question about the solvency of many euro area countries and they are still not addressed.
The risk of calm market situation and the ECB seems to be aware of that if that policy makers delay action. It is not only about structural reforms and fiscal measures in the member countries, its also about all the measures on the European level, thinking about the implementation of the single supervisory mechanism , resolutionary regime for banks. So, the whole banking union question has to be sorted and we still lack the vision and the structure of the euro area in the future and without that this very positive environment we have now is likely to disappear pretty quickly again.
Q: In the ugly baby parade clearly euro looks uglier than what we are comparing it with dollar. What high at all can the euro reach in your view for three months, six months and for 2013 on the euro-dollar pair?
A: We have not changed our view on our rate forecast after yesterday's meeting. As we continue to expect rate cuts to come through at some stage, we expect the euro to become weaker. Our reading is around 1.20-1.27 by the end of this year. So, going mid-year 1.26 with the rate action and then 1.20 as the market is trying to come through at some point.
Q: Do you expect to see correction in asset classes in Asia in the near-term?
A: I am not an expert on the Asian markets, but what we see in Europe I think as long as this positive development story have some more upside on equities, but there maybe some correction looming if this current positive assessment on the crisis and on the euro area economy gets correction as well.
But overall, I think if we get this correction we will see government action not the government action that we wanted, but also the ECB action to come through likely to support the equity market then again, but there is likely to be some correction, not a massive one, but some corrections to take place and it is not a one-way straight way.
