While investment markets are expecting a US rate hike later this month, the European Central Bank (ECB) is likely to go the other way and expand its QE program when it meets on Thursday, says QIC.
Speaking in Sydney yesterday, QIC global liquid strategies research director Katrina King said monetary policies like QE that were once regarded as 'non-standard' or 'temporary' are now firmly within the central bank toolkit.
Ms King said QIC "fully expects" the governing council of the ECB to cut interest rates at its meeting on 3 December 2015.
The cut will "probably" be accompanied by an extension in the duration and size of the QE program in Europe, she said.
"Not necessarily because Europe is teetering on the brink of another recession.
"But because there’s so much extraordinary monetary policy elsewhere in the world, we think that Europe really wants to over-stimulate the economy and to reach an 'escape velocity' fuelled by a lower euro," Ms King explained.
She pointed to comments made by ECB president Mario Draghi in a speech on 22 October 2015, in which he said the "degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting".
"The governing council is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation," Mr Draghi said in October.
Ms King noted that some members of the ECB governing council had hinted at the possibility of "acting in October".
"So clearly December is on the cards, not only for an interest rate cut, but also perhaps for an extension and an increase in the amount of QE," she said.
But the reason for the ECB's move is more elusive, given that PMIs are heading up, growth is coming through in the eurozone and inflation is on the up, Ms King said.
"What we’re seeing is that this is all about currency. It’s all about the currency war," she said.
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