Draghi aims for consensus; rate-cut on the cards:StanChart

Sarah Hewin, chief economist - Europe, Standard Chartered, explains to CNBC-TV18 that ECB chief  Draghi is attempting to build consensus before the central bank's meeting on September 6.  Hewin adds that even if the expected rate-cut of 25 bps is not announced, Draghi will reveal other policy measures which may include easier collateral terms ahead of another LTRO.

Below is an edited transcript of the analysis on CNBC-TV18. Q: What do you expect from Ben Bernanke and how do you think the markets are positioned? For the past on week, most have been dithering at their highs, unwilling to go higher. Do you think the markets will be disappointed?
A: According to the Fed minutes, it had flagged that there was no concern and possibility of any further QE since the meeting at the beginning of August. But the US data has come in a little bit stronger. Retail sales has been good, there has been a rise in employment and the housing market is turning around. So we think that the Fed will probably hold its fire at the the FOMC meeting in mid-September.
Regarding what Bernanke is likely to announce at the Jackson Hole meeting on Friday, we are looking forward to an acknowledgement of the improvement in the economy and outline once again the circumstances under which the Fed might feel the need to take action to ease policy.
He might also explain on the sort of easing that would be initiated. But I think that he will be very reluctant to run the FOMC meeting. So there isn’t going to be a repeat of the announcement regarding another round of QE made by Bernanke in Jackson Hole in 2010. Q: In a column in Die Ziet, Draghi pointed out that it was important to build consensus around Germany's current opinion and he did not want to explicitly go against what the Bundesbank’s opinion. Do you think this is an indication that Draghi is not going to announce anything that is going to be explicitly rejected by the Bundesbank in the September 6 meeting?
A: The ECB can go ahead even if it doesn’t have the wholehearted support the Bundesbank and indeed that’s what it did when it launched the securities market programme the first time around. It went ahead with bond purchases even though the Bundesbank was against the process.
So I wouldn't say that his comments indicate that the ECB is not going to take any action. He is trying to build consensus. I think he has the backing of Merkel and the higher the echelons of government, but perhaps lesser support from the rank-and-file in Parliament. So, the Bundesbank is cautious about the need for any further bond purchases.
There might be a delay in the announcement. The ECB is supposed to be working on the technical arrangements and essentially revealing the details of how it would go about holding borrowing costs lower for the peripheral countries. Much of the details may not be revealed at the meeting on September 6.
Though there maybe a vague reference, the market will know about it only when the ECB takes action. The ECB has certainly signaled that it is likely to target the short-end of the yield curve. So we anticipate bond purchases of one to three at the end of the year. Q: How many of these are you expecting to be announced on September 6?
A: We think there is still a chance of a 25 bps rate-cut being announced on September 6. But if the ECB hasn't got the full details of the bond-purchasing programme by then, it is likely that it will announce other policy measures which may include easier collateral terms ahead of another LTRO.
Some of the data released by the European central bank on Wednesday showed that bonds-purchases by banks was falling in countries like Spain and there is a need for injection of further liquidity.
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So, even if the full details of the bond-buying programme are not announced on September 6, that doesn't necessarily mean the ECB is going to sit idle. The central bank may just go ahead and launch the programme.
But the dispute within the ECB about the format of the programme may delay announcements on September 6. Q: Anything other than the ECB that you would watch out for in Europe?
A: We are keeping a constant eye on the economic data which has been deteriorating not just in economies on the periphery, but also in Germany. Today there was a sharper-than-expected rise in employment and the survey data for Germany has begun to deteriorate.
The confidence indicators this morning may reveal a lesser-than-expected relief that the markets will pay close attention to.
From our point of view, they are quite significant. We think that they will flag worsening confidence- we know that consumer confidence is down and we think that the business climate will be weaker and economic sentiment in general will have to turn weaker as well.
Coming back to Germany- the problem is clearly not limited to the periphery but a more broader problem for the whole euro region including those countries like Germany that until spring, were doing fine. Q: Opinion-makers indicate that there is a high probability of an exit by Greece. Do you think that event has been factored in now to a certain extent by the market and it could transpire without causing the system to collapse?
A: Our people are cautious about expecting an exit by Greece to be painless. The Italian and Spanish bonds have rallied on over the past few weeks since Bernanke announced that the Fed will prepare to do what it takes to hold the euro together.
But I think there is scope for renewed concerns in September for more potential shocks, the confidence in the Greek situation does look very difficult. There is risk of a confrontation between the government and the Troika, and in my view the risk of contagion is still very high.
I don't think that the exit would be pain-free. Until we have the more clarity from the German Constitutional Court, the firewalls are not adequate to really protect Spain and Italy in the event that there is an escalation of the crisis. Q: A senior European Financial Stability Facility (EFSF) official, during his visit to India, said that there was very high probability of the German Constitutional Court not thwarting the process; not negating the European Stability Mechanism (ESM). What is your opinion? The markets don’t seem to be really worried about what that court will say. Will that transpire as expected?
A: Though I think the process will not be hampered, there is the risk of an adverse announcement. On the whole, I think markets are probably factoring in that the Constitutional Court will not prevent the ratification of the ESM and that would clearly be a sort of positive and would reduce some uncertainty.
But until we get that announcement, I don't think we can really breathe easy. We have to see what happens on September 12. Obviously if there is an adverse ruling, it will be a big shock for the market.