The European Central Bank held interest rates at 1% on Thursday and will resist calls to do more to fight the euro zone crisis.
In an interview to CNBC-TV18, Sarah Hewin, Standard Chartered Bank says, she expects the ECB to cut rates at the June meeting. "We still do expect that there will be a rate cut by the ECB, if not in June then in Q3," she asserts.
According to her, the ECB really wants to wait. "It genuinely does believe that better times are around the corner. So, they do want to give the markets any sense that rate cut is eminent. Amongst the discussion, there probably would have been recognition of the weakness of the survey data. So, although they may not have mentioned it in more detail talking about rate cuts, I think that they would have certainly discussed concerns about the economic outflow," she adds.
Below is the edited transcript of her interview on CNBC-TV18. Also watch the accompanying video.
Q: I doubt you were surprised by what the ECB did not do, which is to refer to either a rate cut of any sort or introduce any fresh liquidity measures.
A: We hadn’t been expecting any major policy change to be announced. But we had expected that there might be some signal on easing policy in the June meeting and not something which didn’t happen. Obviously, the markets were somewhat disappointed by the fact that there wasn’t even a discussion of a rate cut.
Having said that, some of the comments that Mario Draghi made were pretty downbeat on the economy, essentially the European Central Bank (ECB) is helping but its liquidity measures will essentially come good. But the additional liquidity that they have injected into the banks will find its way into the real economy in time. But our view is that ECB is very much in a wait and hope mode at the moment.
Q: Can you try and explain to me from the ECB point of view why they did not even discuss a rate cut or made no mention for the next policy announcement at all?
A: Yes that’s right. I think that the ECB members, the governing council, are very sensitive to not sending particular messages out to the market. Clearly, if they had acknowledged that they have discussed cutting interest rates then the market would have let gone that and probably pushed market rates lower.
Now, the ECB really wants to wait. It genuinely does believe that better times are around the corner. So, they do want to give the markets any sense that rate cut is eminent, if that is indeed not the case. Amongst the discussion, there probably would have been recognition of the weakness of the survey data. So, although they may not have mentioned it in more detail talking about rate cuts, I think that they would have certainly discussed concerns about the economic outflow.
Q: Are you saying that they expect the data to improve and hence therefore are not counting in the need for a rate cut, let us say in the next policy meet or are you saying that they may have acknowledged the need for a rate cut, but don’t want to give that away to the market as yet and possibly even though they haven’t mentioned anything this time around, we might see a rate cut in the next policy announcement?
A: I think that they genuinely do believe that the economy will turnaround. That is not to say that things are necessarily looking a lot better, but certainly from their point of view, some of the lending surveys are not deteriorating at a more rapid rate.
Having said that, I think there is still scope for them to cut rates at the June meeting. So, I guess we would probably anticipate that in June. So, we still do expect that there will be a rate cut by the ECB, if not in June then in Q3.
Q: What do you think the ECB will do, if at all regarding the rising Spanish yields that we are seeing?
A: I think if yields get to dangerous levels, they will be starred as securities market programme. That is they will buy Spanish bonds to bring the borrowing cost down.
Q: What do you define as a dangerous level?
A: It is not the level so much, it is the pace of rising, so sharply rising higher above 6% on ten-year bonds.