20 Jan 2015
ECB to announce conditional QE of at least €40bn/month - Nomura
FXStreet (Bali) - ECB looks set to announce sovereign QE of at least €40bn a month conditional upon inflation, with a state-contingent bond buying program to alleviate absence of full risk sharing, notes Nomura.
Key Quotes
"The two contingencies for further action have both been clearly triggered in our view, and we continue to expect the ECB to announce on 22 January (75% probability) a large-scale asset purchase programme, including sovereign bonds, in response to increased deflation risks and the de-anchoring of inflation expectations. In addition to sovereign bonds, we expect the ECB to broaden its existing ABS and covered bond asset purchases to include corporate bonds, supras and agencies."
"Our views are largely unchanged from How will QE be designed?, 18 December. We believe around €700-750bn of additional assets purchases (i.e., on top of the existing measures of CBSPP3, ABSPP, TLTROs) are needed to achieve balance sheet expansion to around €3trn by mid- to end-2016. However, our baseline remains that the ECB communicates a monthly flow of public and private sector asset purchases of at least €40bn per month (calibrated upon reaching €3trn by end-2016), for as long as necessary conditional upon the inflation outlook. The respective sovereign bond purchases would be close to €25bn per month, allocated according to the ECB capital key (with small adjustments to control for too-small markets in some countries)."
"We believe such a state-contingent flow approach is essential to allow the ECB to maximise flexibility and credibility (and is not prevented by the recent ECJ Advocate General Opinion on the OMT). Such an announcement would give markets the greatest certainty that the ECB is prepared to do “whatever it takes” to try to return inflation to its target, a crucial signal when inflation expectations are particularly low."
Key Quotes
"The two contingencies for further action have both been clearly triggered in our view, and we continue to expect the ECB to announce on 22 January (75% probability) a large-scale asset purchase programme, including sovereign bonds, in response to increased deflation risks and the de-anchoring of inflation expectations. In addition to sovereign bonds, we expect the ECB to broaden its existing ABS and covered bond asset purchases to include corporate bonds, supras and agencies."
"Our views are largely unchanged from How will QE be designed?, 18 December. We believe around €700-750bn of additional assets purchases (i.e., on top of the existing measures of CBSPP3, ABSPP, TLTROs) are needed to achieve balance sheet expansion to around €3trn by mid- to end-2016. However, our baseline remains that the ECB communicates a monthly flow of public and private sector asset purchases of at least €40bn per month (calibrated upon reaching €3trn by end-2016), for as long as necessary conditional upon the inflation outlook. The respective sovereign bond purchases would be close to €25bn per month, allocated according to the ECB capital key (with small adjustments to control for too-small markets in some countries)."
"We believe such a state-contingent flow approach is essential to allow the ECB to maximise flexibility and credibility (and is not prevented by the recent ECJ Advocate General Opinion on the OMT). Such an announcement would give markets the greatest certainty that the ECB is prepared to do “whatever it takes” to try to return inflation to its target, a crucial signal when inflation expectations are particularly low."