See ECB cutting rates by 50 bps on Thursday: StanChart

Sarah Hewin, regional head of research, Standard Chartered believes the European Central Bank (ECB) may cut 50 basis points in its impending monetary easing policy. Most market analysts have factored in atleast a 25 bps rate cut from the meeting on Thursday.

On what the ECB can do further to give some boost to the beleaguered  European economy, Hewin adds, "They may decide to try to support particularly small and medium size enterprises. They could announce the securitisation of loans to small businesses. They could ease collateral requirements."

Also read: Europe austerity debate to test periphery political will

Below is the edited transcript of Hewin’s interview to CNBC-TV18.

Q: The stocks in Europe have been running up probably because of some final peace in Italy and hopes of the European Central Bank (ECB) giving a rate cut. How seminal will be the rate cut even if it comes? Do you think it is largely factored in?

A: I think it is largely factored in. The risk here is if the ECB decides not to go with a rate cut on Thursday. Our own view here is that we will see a rate cut this quarter and we think that there is a good chance that there will be a cut of 0.50 percent on Thursday. The ECB has been very reluctant to make this move with plenty of evidence that the economy is struggling. It is possible that they could decide to delay any rate cut until next month. Next month they will have to revise star forecasts for the economy. They will also have the evidence of how weak the first quarter was, they will have the first quarter gross domestic product (GDP) numbers out in May. So, a lot is largely factored into the market but we have to be cautious because it is still quite a close call in my view.

Q: Apart from the ECB impending rate cut, the other positive or potential positive outcome is the formation of a new government in Italy that is being put into place. How much of an overhang do you think that removes from the European markets? How would you approach that particular trigger?

A: It is certainly a positive move. We have had no formal government in place in Italy since elections on the February 24. There was a long time, an impasse that individual parties could not decide. They have a ground coalition between the centre left, centre and the centre right. Market response has been positive. Yesterday, we saw Italian yields on the five and 10 year maturities falling to their lowest levels since October 2010.

However, the popular support for this government is not so strong. Indeed, the ratings for the Prime Minister are in the low double digits. By contrast, when Mario Monti came in had support of up to 70 percent. So, let’s watch this space and see whether the government can actually survive.

Q: Is there any other expectation from the ECB at all considering that growth numbers have been coming in weak?

A: What the ECB might decide to announce on Thursday is some more non-standard measures. Their concern is that market interest rates are low, but the transmission mechanism is not working. So, they may decide to try to support particularly small and medium size enterprises. They could announce the securitisation of loans to small businesses. They could ease collateral requirements. We think that at some point, they may announce more long term refinancing operations (LTRO). There are a number of other measures that they could decide to adopt rather than going for a rate cut on Thursday or possibly in addition to a rate cut.

Q: How would you approach the global equity space now? We were speaking with JPMorgan earlier in the morning where they mentioned that developed markets will continue to outperform emerging markets going ahead at least in through the summer. What is your expectation and how would you approach global equities?

A: Global equities are benefiting from substantial liquidity in markets at the moment. If one looks at the fundamentals, we still see that the positives in developing markets, in emerging markets, growth rates across the board in the developed markets space are going to be pretty subdued for this year. On the other hand, if we look at what we can achieve in terms of GDP growth in Asia, in Africa, then the potential is a lot higher. We think that it is good time for equities, low inflation, substantial liquidity, ongoing easing by central banks but the fundamental underpinnings for the market we think are still pretty good in emerging markets.